annuities - am I missing something?
3-Sep-07 08:08 PM
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As a change from looking at share prices and quickly checking the gold price (important as a nouveau partial goldbug) I cast my eye over annuity rates for the first time the other day. the average was around £6500 for a pension pot of £100,000.
Now, roger me sideways if I'm mistaken, but you can get that much from some high yielding bonds (Birmingham Midshires pays 6.7%). Also, over long periods of time, the ftse returns at least this much. All of this WITHOUT losing your capital.
So...what have I missed? Are annuities a massive rip-off (surely not?) or is there some clever and highly sophisticated argument for holding them? Please could someone come to my rescue and explain this as I would hate to lose faith in what is presumably designed to provide for the dotage of the m$%^&.
Yours in eager anticipation
P12
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piquod12
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Re: annuities - am I missing something?
4-Sep-07 03:14 PM
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whilst agreeing that Annuities do not give a great percentage return, if one factors into the equation that one can get 25% of the pension pot in a tax free lump sum, plus the fact that you will have received either 22% or 40% tax relief on your contributions, the overall result is not as bad as it first looks
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n.white01@bt...
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Re: annuities - am I missing something?
4-Sep-07 03:26 PM
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1. Annuities provide you with a guaranteed income for life (level of increasing), and, if you so choose, a proportion (or all) to your spouse/partner after you die. In contrast, a corporate bond, whilst seemingly attractive, has no guarantee to capital value (unless held to redemption and the company does not default) or income (providing the company doesn't default).
2. Unless you choose to draw down income from your pension (expensive and subject to charges and investment risk) you have to purchase an annuity. IN any case, you will have to purchase an annuity at age 75 (unless you are willing for your family to suffer extremely punitive tax after death after the age of 75).
3. You have benefitted (as mentioned above) from (almost) tax free growth and you can take 25% of the money to put in that corporate bond if you want. I'd be careful though! (all eggs in one basket etc).
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Craig H
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Re: annuities - am I missing something?
5-Sep-07 09:58 AM
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The question of a guaranteed income from buying an annuity is a misnomer. The guarantee is only as good as the providing company. If the government is forcing us to buy annuities at a certain age it should also provide a cast iron guarantee that the money is fully safeguarded. An annuity provider getting into financial difficulty is an accident waiting to happen.
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NICHOLAS B
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Re: annuities - am I missing something?
6-Sep-07 02:36 PM
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That you receive 25% tax free from your pension fund and that you have received tax deferment (not relief, as you will be taxed on your pension income) on your pension contributions has nothing at all to do with annuities.
Annuities are not good value. The £6.5k income referred to is a fixed income, if you want any form of index linking the return on £100k is more like £4k - £4.5k. These levels are at a recent peak and are if anything, likely to fall over the coming months.
I do believe that annuity rates would rise in relation to other investments if the government insistence or their purchase was to be withdrawn. A bit more competition with other forms of investment would prove very telling.
With regards pension saving, if you are a basic rate taxpayer, if it is worth saving at all, it may be worth considering foregoing the tax relief on contributions invest the remainder in an ISA. At least at the end of it the income will be tax free and the capital will remain with your estate when you die. That is, of course, in my humble opinion!
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Richard S
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Re: annuities - am I missing something?
4-Sep-07 03:43 PM
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No, you are right, it is shocking. The best bet is to move your money into a SIPP such as Sippdeal with no charges and take a drawdown instead of a pension. At the moment, if you survive to age 75, the nanny state will force you to buy an annuity with what is left, but this law may change in time and anyway if you take the maximum drawdown (even if you don't need the money), you can then reinvest it outside a pension wrapper. Annuities exist to provide for the annuity provider not you or me. In extreme old age when we get muddled in the head it may have its uses, but not if you are "all there" as you seem to be.
Good luck
Keith
ps. try Sippdeal.co.uk I have been using them for years and they are excellent.
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Keith A
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Re: annuities - am I missing something?
4-Sep-07 05:26 PM
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Thanks Keith, I suspected as much and this view was only strengthened today when Standard Life announced record profits on the back of selling pension products.
I invest for myself and will continue to do so rather than rely on a fund manager, pension scheme (good word for it!) or the state.
Rgds
a deeply cynical P12
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piquod12
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Re: annuities - am I missing something?
4-Sep-07 06:51 PM
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The benefit of annuties are that they provide a guaranteed income for life. The relative high cost is because of this guarantee, whilst I agree that income drawdown is a more flexible investment structure it has a much higher level of risk which may not be suitable for all people especially in a falling market and for those who consider themselves cautious. if you are considering taking out an income drawdown contact please check the 'critical yield' needed to maintain the level of income you are taking at the start... this is the rate of growth your pension pot must grow at to maintain the income... if it does not achieve this rate then your income will be reduced at your next review (your income may also increase if it grows above the critical yield)
Hope this helps.
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John D
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Re: annuities - am I missing something?
4-Sep-07 07:56 PM
If you want to see how Standard Life and the other insurance companies makes their money, just try the following simple spreadsheet calculation. Assume a 60 year old male living in the UK - the Government Actuary tables ( www.gad.gov.uk) estimate that he'll have another 20.49 years of life. If you assume a 6.5% payout (not linked to inflation) and a 4% return on treasuries, then the annuity provider stands to make around £22,000 profit from the residual balance when the the man dies. Not a bad return for taking virtually zero risk, bearing in mind that the insurance company has thousands of annuities and while some people will live longer, others will live shorter, but the average will be in line with the actuarial tables.
What's really needed is for people to be allowed to switch their annuities (using the balance of the remaining funds) so as to create a competitive market - this would add some competition and give us all a better deal.
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Graham
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Re: annuities - am I missing something?
4-Sep-07 08:47 PM
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thx Graham, I was going to make the same point but couldn't come up with real numbers cos my excel spreadsheet seems to be having the evening off.
The sickener is you don't have the choice. Once I get to my dotage (closing in quicker than I like) I'd rather have control over the cash and if it runs out let the children feed me for a change. By that stage I might be a drooling vegetable (halfway there already as my OH will testify following the 'saliva incident' at dinner) and not care anyway.
P12
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piquod12
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Re: annuities - am I missing something?
4-Sep-07 09:51 PM
Re: annuities - am I missing something?
5-Sep-07 08:06 AM
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The reason why people don't save is that they simply do not trust the pension providers any more, and with good reason.
Apart from the dismal performance of so many of them, there is the absolute inequity of being forced to buy an annuity.
You retire and unfortunately on day 2 you and your wife are killed in a car crash.What happens to your lifetime savings? They disappear into some fund managers pocket, your children end up with nothing. Who wants to put money into that?
The Turner report, lauded as being an example of revolutionary thinking, was no such thing. It's 'blue sky' thinking? work until you are 67! Wow! Why didn't he propose a completely different form of fund that would offer the same tax incentives for saving as a pension, but gives the individual absolute control over the money upon retirement? I tell you why, because of pressure from the pension industry.His report was a waste of several forests.
Until someone really does take a radical view of pensions, the issue will remain with us for ever.
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nigel.tipple...
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Re: annuities - am I missing something?
5-Sep-07 10:54 AM
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You are correct that pension annuities are a rip off. The arithmetic is simple. If a 65 year old male has a pension pot of £100,000 he can get a single life level annuity of about 7.2% for life. Life is on average likely to be another 15-20 years, The yield on 15/20 year gilts is guaranteed today at say 5.2% so the insurance company has to use the capital for 2% each year (that is 7.2% minus 5.2%). This means that if you die per the actuarial tables (say 20 years later), they keep the unused capital of £600,000!. Of course it is a bit more complex than this but not much. They will say that life expectancy is increasing and that they have to operate annuities conservatively etc etc . The real villain is the absurdly low rate on gilts which is caused by the Treasury rule that trustees of pension funds must match their liabilities in gilts. This gives the government a cast iron source of cheap finance. In essence, your pension fund capital is being stolen to fund government expenditure. In many other countries, you can have access to the whole of your pension fund capital on the day you retire as long as you pay back the tax relief given and you buy a small annuity sufficient to keep you off state benefits. You might like to ask your MP why we do not have this in the UK and make sure you vote for a political party that promises to bring in this idea.
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howard s
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Re: annuities - am I missing something?
5-Sep-07 12:25 PM
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Some points:
1. Annuities are an insurance product and as for all insurance products there are winners and there are losers. If you live a longer than about 20 years you win if you don't you lose. You don't hear people in there 90s who have been receiving annuity payments for 30 odd years complaining about what poor value they are. The capital left when someone dies young doesn't go straight into the provider's pockets but goes towards paying income to those people who longer than expected. Yes the providers make money but that's capitalism.
2. You rightly point out that a proportion of the income is paid for from the capital. However, this amount is not fixed but goes up each year as the amount of interest falls due to the lower capital amount. So, by the time you are 10 years in to an annuity more than half the income paid is from capital. In your example all the capital is gone by the time the person is 84 and there certainly is not £600,000 after 20 years left as you claim.
3. Your comment about it all being the fault of the government is bizarre - do you really think the treasury should pay more than it needs to for borrowing - who pays for that? The taxpayer of course. The economic reality is that long term interest rates are low which gives us many benefits but also has downsides, low annuity rates being one.
In short annuities may not suit everyone but for the majority of pensioners they are the right product at a fair price and I don't believe that annuities are a rip-off.
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JP
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Re: annuities - am I missing something?
5-Sep-07 12:43 PM
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'the right product at a fair price and I don't believe that annuities are a rip-off.'
I guess what grates the most is the price. Why should fund/institution managers, and I lump in unit trusts, endowments, pensions and insurance together here, command such a cut? Over time the charges compound up into an obscene amount that is not available for the saver.
If the job were particularly difficult (compared to, say, operating on a patient, trying to teach a class of 13 yr olds or even driving a lorry) then maybe there's a case, but the fact is it isn't difficult. In fact I reckon anyone with 11+ maths, half an inclination, plus access to a spreadsheet could match the performance of most fund managers (which is usually dismal compared to underlying markets, again thanks to charges) at a fraction of the cost.
Fund management hides behind a wall of mystique. The puzzle is why this has not been blown open and, in the time honoured fashion of capitalism, been competed away. Maybe it's just a matter of time and this will happen. I for one hope so and the sooner the better.
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piquod12
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Re: annuities - am I missing something?
5-Sep-07 01:06 PM
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Completely agree with you on fund managers - they get paid a hell of a lot for very little (as do most Financial 'Advisers').
I am not sure that this applies to annuities though as the underlying investment is pretty much limited to gilts and high quality corpoarte bonds and as they are managed in-house the fees are fairly low.
I don't deny that annuity providers make a profit on annuities but the risks that take are far higher than fund providers - e.g. if life expectancy increases by just a few months beyond their best estimates their profits disappear and losses start to mount.
The big problem with trying to say whether or not we are being ripped off is that until 50 years have passed and all the people who buy annuities this year have died we can't know what profit or losses the company has made.
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JP
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Re: annuities - am I missing something?
6-Sep-07 11:50 AM
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JP is right to say that there are winners and losers in the annuity lottery and that this is just capitalism.
Unfortunately, i have no wish whatsoever to have my children disadvantaged just so that my residual pot of savings can be used to pay someone else who has the good fotune to live longer that either my wife or i. Selfish? I don't think so. I have not worked all my life for the benefit of other people, i already do that by paying ridiculous amounts of tax.
Radical thinking is required on this issue if we are to solve it no only for our generation, but also our childrens.Have you ever tried talking to your children about pensions? You may as well be discussing the matter with your pet budgerigar.
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nigel.tipple...
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Re: annuities - am I missing something?
5-Sep-07 11:52 AM
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Yes we are all missing something usually the money. You will have noticed that Rank are the latest company to be in the process of selling their pension fund.Why would anyone want to buy it if there is not any money in pensions ?. Companies are being set up specifically to buy out these pension funds and,of course, the only reason is that a great deal of money can be made from them.It certainly seems that the only conclusion one can draw is that the government, while looking after civil service pensions especially their own, are quite happy for the rest of us to be fleeced.
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rs7385
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Re: annuities - am I missing something?
5-Sep-07 01:07 PM
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You fail to realise, government couldn't give a flying **** about you. As far as they are concerned me, you and everyone else are their slaves. All the government is interested in is themselves.
There is the occasional good MP, but basically government is corrupt to the core.
You could rot for all they care, thier gold plated pensions will keep them!
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taffyapple79
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Re: annuities - am I missing something?
5-Sep-07 01:12 PM
Re: annuities - am I missing something?
5-Sep-07 03:41 PM
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Q. Are Annuities a waste of money?
A. It depends on the individual and the amount of research they do.
The majority of clients that I come across do not realise that they can enhance their annuity income by letting their IFA know that they are in ill health or a smoker. If they are we can see an enhancement of around 4-10% for this individual which will really make the difference.
Q. If I buy an annuity and die shortly after all the money goes to the Life Company.
A. Not Necessarily - A new feature which has been introduced which combats this by paying back a lump sum of the clients original fund value to his nominated beneficiaries if they die before the age of 75. The lump sum will be made up of the FV minus any payments already made and minus 35% tax. E.g. Fund Value of £100k, 10 annual payments of £5000 = £50k left minus 35% tax leaves £32,500 being transferred to the nominated beneficiaries.
This feature is called Value Protection.
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GR
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Re: annuities - am I missing something?
5-Sep-07 08:59 PM
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I've always been taught that there are two things regarding money (1) One who has income, saves to acquire 'capital , usually in ones younger life. (2) One who has acquired 'capital', requires an income, usually in later life.
Capital can come from the turning of ANY asset into 'cash' - therefore the 'tax savings' mentioned in other 'postings' become irrelevant and an Annuity must be judged on its' [risk/return factor alone] - ever-remembering that an Annuity is just another form of 'insurance' with the 'insurance provider' holding the 'book' and setting the 'odds' - [in their favour].
I remember watching a TV programme called 'Wickers World' (some maybe too young to remember it), in which Alan W interviewed old Percy Shaw ( the cats-eye inventor, from Bradford , Yorkshire) - they too were talking about money, referring to all the money Percy had made and ac$%^&ulated from his simple invention over the many years, WorldWide - Old Percy questioned Alan W by asking him ! - "How long can you live on your capital ?" - Alan W looked at his watch and said " What day is it ?".
In my opinion, this is a very important issue and one that can not be taken too lightly.
SillyBilly
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SillyBilly
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Re: annuities - am I missing something?
7-Sep-07 04:19 PM
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Annuities are a rip off.
There should be a mechanism to allow you to take all of your pension pot in cash - even if it means giving up the tax relief enjoyed in previous years,
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THOMAS
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Re: annuities - am I missing something?
10-Sep-07 08:05 AM
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Two points to this argument...firstly as annuity payments have to be guaranteed for life, the underlying assets can only be invested in Gilts, and Investment grade Corporate Bonds, the return on which is currently low. Secondly in addition to people living longer (on average), and therefore the annuity having to be paid for longer, those in poorer health (who would otherwise die early and subsidise the longer livers), are opting for income withdrawal (quite rightly) but it starves the annuity pool, leading to a double whammy on annuity rates.
I agree that it all needs some radical thinking. We nearly had it in the April 2006 changes(A-Day), but despite some excellant flexibilities being proposed in the consultation papers, the Gov.t/HMRC ultimately reverted to type (again).
Lastly in answer to a previous opinion, there are some very good financial advisers out there who like myself have acquired professional qualifications and work extremely hard for our clients. Unfortunately the role has acquired a poor reputation as a result of allowing those with minimal qualifications to practise (especially banks etc.,), and press reporting of a few bad eggs (they don't report on a thoroughly professional job well done).
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ingarfill@bt...
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Re: annuities - am I missing something?
20-Sep-07 01:34 PM
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