Exam ICWIM Topic 4 Question 141 Discussion

Actual exam question for CISI's ICWIM exam
Question #: 141
Topic #: 4
Your client estimates that they will require £40,000 of income annually to live off when they retire. Personal plus state pension will provide £35,000. They wish to retire in 20 years' time. It is estimated that they can earn
3% per annum and inflation has been forecast at 2% over the next 20 years. Interest rates are currently 1.5%.
Allowing for inflation, what lump sum would they need to accrue to supplement their pension?

Suggested Answer: C Vote an answer

* Determine the shortfall in income:
* Desired income: £40,000
* Pension provided: £35,000
* Annual shortfall: £40,000 - £35,000 = £5,000
* Adjust for inflation over 20 years:Future value = Present Value × (1 + Inflation Rate)^n£5,000 × (1 +
0.02)^20 = £7,430 (inflation-adjusted shortfall)
* Calculate the lump sum required to generate this shortfall:Use the real rate of return formula: (1 + nominal return) ÷ (1 + inflation rate) - 1Real rate of return = (1 + 0.03) ÷ (1 + 0.02) - 1 = 0.98% per year Use the present value of annuity formula:PV = PMT × [(1 - (1 + r)^-n) ÷ r]PV = £7,430 × [(1 - (1 + 0.0098)^-
20) ÷ 0.0098]PV = £7,430 × 44.64 = £331,631

by ali.abussaud at Aug 30, 2025, 02:34 PM

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ali.abussaud
2025-08-30 14:34:41
Selected Answer: B
The correct answer as per my calculation is B
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