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dead_pan
24th Apr 2013, 12:06
I was some perplexed by recent press reports regarding the historic lows in annuity rates currently on offer here in the UK. It has been reported that these are hovering around the 3% rate depending upon your gender etc, which means that to get a pension of just 30K p.a. you'll need a whopping 1m pension pot.

It suddenly occurred to me last night that, when you purchase an annuity, you are effectively giving up your fund's principal and more-or-less living off its interest. Also, the annuity provider are quids-in - unless the fund backing the annuity underperforms the rate they offer, which no self-respecting provider would allow, they'll end up with a tidy sum whenever you eventually peg out.

I'm beginning to think that the only benefit from a pension 25% tax-free lump sum you can take; the annuity component will only provide you with a dribble of an income.

Intrigued to hear what others think. BTW I am aware annuities come with death benefits etc - I'm assuming these come at the expense of the annuity rate offered.

mixture
24th Apr 2013, 12:12
dead_pan,

Bit of a complex area and one you really need a financial advisor you can trust because alternative options may (or may not) be viable for your own personal financial situation. There is no one-size-fits-all correct answer.

Blacksheep
24th Apr 2013, 12:28
Financial Advisor? Its the Finance Industry that dropped us in it. Buy property and rent it out. The income currently far exceeds anything one can get from an annuity. :hmm:

Gertrude the Wombat
24th Apr 2013, 12:40
The income currently far exceeds anything one can get from an annuity.
Maybe. I'm currently looking at a gross return on current capital value (not what I paid for it!) of around 5% (I'm aware there are other areas of the country with lower capital costs but with rents not reduced to match), out of which you have to take various maintenance and insurance etc expenses and allow for voids.

The big difference is that when you die the house, unlike the annuity, is still there.

mixture
24th Apr 2013, 12:59
Financial Advisor? Its the Finance Industry that dropped us in it.

Cut the bull Blacksheep.

Brush, tarnish, don't. End of story. There are many respectable, hard working financial advisers who act with their clients interest foremost.

As I said, retirement planning is a complex area. There is no one correct answer, it is very much dependent on your personal circumstances..... anyone who thinks generic advice and heresay will work without any consideration of the complexities of your personal circumstances doesn't know what they are talking about.

Spend days and months wading through the reams of useless advice on the internet, and then eventually make a decision (probably not the best one).... or seek out decent financial advice which, believe me, does exist.

toffeez
24th Apr 2013, 14:11
Last time I checked, just out of curiosity, I found the same result as in your first para.

I would need to pay an annuity provider one million to receive the UK's average monthly salary.

It's not quite living off the interest, because it's like taking back some of your payment as well.

It's more like a reverse mortgage.
.

BabyBear
24th Apr 2013, 14:20
It is not as simple as having to buy an annuity, or not. There are many more options with drawdown today.

It's not clear from your post whether this is something you are looking at now?

If so professional advice is the only way to go.

BB

dead_pan
24th Apr 2013, 14:21
Yes but the annuity provider will most likely be getting more than 3% return on the money you give it. I assume they don't have to report how well these core funds are performing, as its none of our business.

dead_pan
24th Apr 2013, 14:23
BB yep after years of neglect I've suddenly taken an interest in this. Its fair to say I will be seeking professional help (for the pension too).

funfly
24th Apr 2013, 17:33
I sold a business 10 years ago and if I had taken any of the advice offered to me at the time by banks/friends/financial advisers I would have been broke by now.
With no private pension we rely on the savings to make up our income. The interest 10 years ago gave us a very comfortable income but now we simply draw every month from our pot and one day there will be nothing left.
Bearing in mind that the 'advisor' will always take a cut and bearing in mind that you are nowadays only looking at a few percent anyway, you could consider that with some caution it is best to use your own judgement.
As the first poster said, you need over 1M to get a reasonable income and I can assure you that I didn't start with that.
My biggest sadness is that when the interest was enough to give good living, the total stayed the same. Over the last 5 or so years with low interest rates the capital has continued to drop and this does get scary at times. My spread sheet gives me a date when my money will have run out and I really don't know what I will do then.

Loose rivets
25th Apr 2013, 07:12
You could have written that for me.


I never did take much interest in money. It just seemed to arrive in lumps, and often just in the nick of time. I'd keep my eyes open for property deals, and I was lucky, but I wanted to do the same for my kids. Trouble was, there were three of them and there'd only be one of me.

We got them all started with good equity in homes, and set out to live part of each year helping to look after the new babies in Texas. It was a seriously bad idea. They would have been soooo much better off waiting until I'd pegged it. Mind you, they never asked. Just something I wanted to do.

My home in Essex had always been earmarked as part of my pension. Far too big for the two of us, but despite dabbling successfully in do-uppers for years, I managed to really goof when I sold the last do-upper and the house I'd been in for 33 years. Got top money for them, but then watched prices skyrocket beyond belief. Then came the recession, and a hurty back.

Houses here are dirt cheap, but my pleasant bungalow would be worth ten times as much in Essex - if I could bring the garden with it, so coming home is going to be a testing experience.

The cream has always been the capital gain. Without that, keeping property in a lettable condition means it's not the best return in the world. Not the worst, but it can be a burden. My plan to fix everything from a tap washer to the car's rear axial stopped when the back proved it could beat me. Then interest rates disappeared almost all together. Snakes and ladders. Or to use a phrase I coined: randomness comes in lumps. Planning, like resistance, is useless - if the gods are agin you, and it seems there's one more lesson I am obliged to learn.

I'm not sure if I believe that, but it really is panning out like a needed lesson for the soul.

There's a bloke I went to school with. I've mentioned him before. He came to help me paint my house - that's what he's done for all his working life - and conversation we go around to the houses he'd bought. Eleven of them. Only the one with his dad in it owed anything.

The thing is, when he was at school, he was one of the C kids - not expected to amount to anything, but being in one small town has its benefits. Slow, one-step at a time rewards. Never had the patience for that.

Capetonian
25th Apr 2013, 07:24
Someone once gave me a very good piece of advice which has stood me in good stead and which I will pass on.

It was very simple. Never invest in anything you don't understand and if you do understand it, and you're not happy with it, don't invest in it.

There may be exceptions to this in terms of tax planning, but then again the cost and complexity of some tax minimisation schemes is so great that they may equal or exceed the benefits.

The financial industry has become self serving and parasitic, rather like employment consultancies, creating a need for itself and an army of 'consultants' and hangers-on who are creaming off the benefits.

Annuities. A gamble. They guarantee an income for life. Whether at the end of your life it will have been worthwhile depends on how long you lived for, and that is the great unknown. However they package and sell them, they are all based on the same principle.

Erwin Schroedinger
25th Apr 2013, 07:55
to get a pension of just 30K p.a. you'll need a whopping 1m pension pot

So, if you simply bank the 1m and withdraw 30,000 a year for 1000,000 / 30,000 = 33.33' years, you can retire at 65 and phone Social Security at 98. Who needs an annuity, then?

That ignores any interest you could earn. Inflation hammers you whichever route you take, although investing 1m might beat that, but an annuity (even one increasing at the lying, deceitful, misleading, conning, Government manipulated RPI) will not.

In the end, it boils down the Governments fault for (a) - having no genuine interest in protecting or encouraging anything other than Public Sector pensions and (b) - insisting that an annuity be taken up. I believe (b) is due to change, or already has changed, with certain conditions attached (can't recall the details) to (in a world of fantasy) avoid you cadging from Social Security at some point.



.

mixture
25th Apr 2013, 08:04
The financial industry has become self serving and parasitic

Oh right... so let me guess....

You don't have a bank account
You don't invest in equities, funds or anything else.
You've never had a mortgage
You don't have any credit or debit cards
You don't have pension provisions

Talk about the pot calling the kettle black. :ugh:

I'm not saying the financial industry as a whole is perfect, but I'm saying that its simply not possible to tarnish the whole industry with the same brush.... spend a little bit of time sorting the wheat from the chaff and you'll find hard working individuals willing to help.

The financial industry is a necessity, and in this day and age with non-existent interest rates, unless you need to, leaving large portions of your cash in the bank or in savings is pointless as it will be eroded by tax and inflation. If you are an average Joe who has no idea about financial planning or investment, then you do need solid financial advice based on your personal circumstances and not just generic heresay that you find on the internet or down the pub from your mates.

BabyBear
25th Apr 2013, 08:12
In the end, it boils down the Governments fault Here we go, always someone elses fault, entirely.:ugh:

The only sensible way forward is to seek advice to ensure a knowledge from which to base decisions.

For example how many know that a pension fund is subject to 55% on death and is not subject to the IHT threshold being met? Little gems like that can make quite a difference in planning.

Or what about considering it this way:

Yes, yes I know there are many considerations but for the princple!

An investment of 100K in a pension will cost 60K net for a 40% tax payer, take 25% of the 100K as a lump sum and the net contribution is 35K and a fund of 75K. Taking 3% of the remaing fund = 2250, which actually equates to 6.4% of the net 35K 'cost'.

But then for those who don't think advice is good, or indeed those providing it deserve paying, or that it is always someone elses fault just stick your heads back in the sand.

BB

Capetonian
25th Apr 2013, 08:21
Oh right... so let me guess....

You don't have a bank account
You don't invest in equities, funds or anything else.
You've never had a mortgage
You don't have any credit or debit cards
You don't have pension provisions

Talk about the pot calling the kettle black.

Of course you are wrong on all of those. Oh, but you were trying to be snarky, weren't you?

They are necessities and you know as well as I do that it is effectively impossible to live without at least 4 of those. The point I was trying to make, and I think you knew it, is that the 'consultants' and snake-oil salesmen of the industry are parasitic and self-serving.

dead_pan
25th Apr 2013, 08:40
So, if you simply bank the 1m and withdraw 30,000 a year for 1000,000 / 30,000 = 33.33' years, you can retire at 65 and phone Social Security at 98. Who needs an annuity, then?

Exactly where I started - the payback period, assuming no capital growth, is the reciprocal of the annuity rate. Not sure that many of us are going to make it to this ripe old age.

An investment of 100K in a pension will cost 60K net for a 40% tax payer, take 25% of the 100K as a lump sum and the net contribution is 35K and a fund of 75K. Taking 3% of the remaing fund = 2250, which actually equates to 6.4% of the net 35K 'cost'.

A better way of looking at it I suppose. Question is whether you could do better with that 60K - beginning to scare myself when looking at the performance of some pension funds (mind you if you think you could perhaps a SIPP would be the route to go).

Actually drawdown looks a sensible alternative (thanks for the steer). No doubt by the time I come to retire the rules would have been relaxed even more.

BabyBear
25th Apr 2013, 11:12
could you do better with the 60K?

What are you comparing it to? You have a 75K pension fund, which you may elect not to buy an annuity with but invest and you still have the 25K cash to invest.

There are many reasons pensions are not proving irresistible to many. I suggest loss of control of the funds being the major disadvantage and the tax breaks and having employers contribute being the main advantage.

Many simply opt for an ISA, not so tax effeicient with contributions, more tax effieceint and flexible when drawing, the retaining control often seen as outweighing the disadvantage.

Glad you found interest in the drawdown options.

BB

Keef
25th Apr 2013, 11:27
I like the advice that "If you don't understand it, don't buy it."

Years ago, SWMBO was "advised" to take out an AVC (added pension thingy) which she did. After we realised that the provider was sending us rather a lot of revised Ts and Cs, I did some calculations. Based on what she was paying in and had already paid in, she would have to live to 92 to get her capital back with no interest. It was an absolute rip-off, even though highly recommended.

After some complaints and seeking advice from various official bodies, she was "allowed" to stop paying into it and the benefits were frozen. She still has to live to 92 to get her money back, though.

Daughter 2 was buying a new house, and the estate agent's "internal" mortgage broker was trying to sell her an endowment mortgage. I went along to the "final interview" to look at the deal: it was a very large sum to the broker and a lousy deal to daughter. She chose a straight repayment mortgage plus a "declining balance due" insurance for a very much lower monthly payment and a much more transparent end-point.

Financial Advisers - yes, there are some good ones. And some who are less good. The mortgage one above didn't know what "discounted cash flow" means, never mind NPV or IRR. But she was a "Professional Member of the Institute of Whatever" so didn't need to know...

Caveat emptor, innit.

dead_pan
25th Apr 2013, 11:59
There are many reasons pensions are not proving irresistible to many. I suggest loss of control of the funds being the major disadvantage and the tax breaks and having employers contribute being the main advantage.

Not to mention the distrust of the FS industry also the complexity of the whole subject and difficulty/implications of the choices to be made, both of which have already been expressed on this thread.

Re drawdown, the tax charge on the 'final' drawdown is intriguing in that one would have thought this be taxed as income if you took it, or as an inheritance if it went to your beneficiaries.

BabyBear
25th Apr 2013, 12:10
There is much nonsense spoken about the FS Industry, especially on here from some I would have thought knew better.

Yes there are some dodgy characters in the industry, as there are in all industries. How often do you read complaints on here about tradesmen, garages, God forbid even the aviation industry?

Interestingly though you don't seem to be advised not to drive, fly, or forget having the extension built.

Seek advice from a reputable source, there are more of them than there are dodgy ones.

Check your PMs.

BB