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    • OldBlade
    • By OldBlade 11th Oct 16, 8:16 AM
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    OldBlade
    Poor annuity rates
    • #1
    • 11th Oct 16, 8:16 AM
    Poor annuity rates 11th Oct 16 at 8:16 AM
    I have a money purchase pension sum of around £200K and the annuity rates I'm being offered give me peanuts.

    Does anyone have any other suggestions for what I could do to get a better income from this amount?
Page 1
    • PeacefulWaters
    • By PeacefulWaters 11th Oct 16, 8:32 AM
    • 5,070 Posts
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    PeacefulWaters
    • #2
    • 11th Oct 16, 8:32 AM
    • #2
    • 11th Oct 16, 8:32 AM
    How old are you?

    What's the best annuity rate you've been offered?

    How about income drawdown? Perhaps an amount equal to the state pension you'll get when that kicks in?
    • OldBlade
    • By OldBlade 11th Oct 16, 8:40 AM
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    OldBlade
    • #3
    • 11th Oct 16, 8:40 AM
    • #3
    • 11th Oct 16, 8:40 AM
    I've been offered £7100, about 3.5%. I'm worried about income drawdown. It would have to be invested somewhere and the overal value of the fund could drop in these uncertain times.
    • AnotherJoe
    • By AnotherJoe 11th Oct 16, 8:58 AM
    • 4,177 Posts
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    AnotherJoe
    • #4
    • 11th Oct 16, 8:58 AM
    • #4
    • 11th Oct 16, 8:58 AM
    I've been offered £7100, about 3.5%. I'm worried about income drawdown. It would have to be invested somewhere and the overal value of the fund could drop in these uncertain times.
    Originally posted by OldBlade
    It's always been uncertain times.

    You can't have your cake, etc ....

    You could do half and half, take an annuity with half the sum, drawdown from the other which is invested, but you probably have 25-30 years ahead ( I'm guessing you are about 60?) , which is plenty of time for investments to recover should there be a fall. Presumably they are currently invested ? Or did they get "lifestyled" into cash?

    Anyway, you choice is pretty clear take an annuity with a lousy rate,( shop around and you might do better than you've quoted but it won't be by much), or invest, or some proportion of the two.

    Or I suppose just put it all in cash at about 1%, take out 8,000 a year and it will last maybe 30 years anyway and that's still more than you'd get with an annuity.
    Last edited by AnotherJoe; 11-10-2016 at 2:42 PM. Reason: chnaged typo 39 to 30
    • PeacefulWaters
    • By PeacefulWaters 11th Oct 16, 9:24 AM
    • 5,070 Posts
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    PeacefulWaters
    • #5
    • 11th Oct 16, 9:24 AM
    • #5
    • 11th Oct 16, 9:24 AM
    I've been offered £7100, about 3.5%. I'm worried about income drawdown. It would have to be invested somewhere and the overal value of the fund could drop in these uncertain times.
    Originally posted by OldBlade
    If you think you have a low tolerance to risk, then take the annuity. At least you have a choice these days.

    You've been exposed to investments this far though ...
    • OldBlade
    • By OldBlade 11th Oct 16, 9:36 AM
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    OldBlade
    • #6
    • 11th Oct 16, 9:36 AM
    • #6
    • 11th Oct 16, 9:36 AM
    Just running those sums and putting it all in cash could be quite attractive.

    But how to get it out of the pension scheme and into cash without being hit massively for tax?
    • Linton
    • By Linton 11th Oct 16, 9:37 AM
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    Linton
    • #7
    • 11th Oct 16, 9:37 AM
    • #7
    • 11th Oct 16, 9:37 AM
    The only way to get an absolutely guaranteed life-long income in retirement is to use an annuity. However given the current low annuity rates you can get a better income that would have been sustainable until you die at any point in the last 100+ years, including 2 world wars and the Great Crash, by investing. You would need to construct a portfolio that included a very wide range of investments, some very volatile but high returning in the long term, others with a steady but lower return. If you dont have the knowledge to do this, for £200K you should be talking to a local IFA.

    To get some idea of what return is reasonable have a look at www.cfiresim.com. It is based on US data but the general principles and results are good enough for the purpose.
    • Linton
    • By Linton 11th Oct 16, 9:41 AM
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    Linton
    • #8
    • 11th Oct 16, 9:41 AM
    • #8
    • 11th Oct 16, 9:41 AM
    Just running those sums and putting it all in cash could be quite attractive.

    But how to get it out of the pension scheme and into cash without being hit massively for tax?
    Originally posted by OldBlade
    Do you know how long you are going to live and what future inflation will be? If not, how do you decide how much to drawdown in the early years without a serious risk of running out of money before you die?

    How old are you?
    What other retirement income do you have?
    Is the 3.5% inflation linked?
    • OldBlade
    • By OldBlade 11th Oct 16, 9:50 AM
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    OldBlade
    • #9
    • 11th Oct 16, 9:50 AM
    • #9
    • 11th Oct 16, 9:50 AM
    No the 3.5 isn't index linked. A quote for index linking would give me about half that the amount.

    I should come clean here, I'm asking on behalf of my wife who is 60. She has no other pensions other than her state pension which she won't get until she is 66.
    • coyrls
    • By coyrls 11th Oct 16, 10:10 AM
    • 592 Posts
    • 545 Thanks
    coyrls
    No the 3.5 isn't index linked. A quote for index linking would give me about half that the amount.

    I should come clean here, I'm asking on behalf of my wife who is 60. She has no other pensions other than her state pension which she won't get until she is 66.
    Originally posted by OldBlade
    In those circumstances, an annuity is a pretty blunt instrument as well as poor value. It is likely that your wife’s income requirements from 60 to her state pension age will be higher than after she gets her state pension. Get a pension statement to find out how much state pension she will get and work out the shortfall. Look to see if paying additional NI contributions will increase her state pension. Look at using your private pension to bridge the gap between 60 and the state pension age and then to defer the state pension for a number of years, increasing the state pension that she will ultimately receive. Such a strategy is likely to offer much better value than taking an annuity now.
    • coyrls
    • By coyrls 11th Oct 16, 10:14 AM
    • 592 Posts
    • 545 Thanks
    coyrls
    No the 3.5 isn't index linked. A quote for index linking would give me about half that the amount.

    I should come clean here, I'm asking on behalf of my wife who is 60. She has no other pensions other than her state pension which she won't get until she is 66.
    Originally posted by OldBlade
    Sorry, re-reading your post I'm a bit confused. She has no other pension than the state pension and the private pension you are referring to is yours? I think you need to do some joint planning, not just planning for your wife.
    • HappyHarry
    • By HappyHarry 11th Oct 16, 10:53 AM
    • 215 Posts
    • 206 Thanks
    HappyHarry
    Or I suppose just put it all in cash at about 1%, take out 8,000 a year and it will last maybe 39 years anyway and that's still more than you'd get with an annuity.
    Originally posted by AnotherJoe
    If I've misunderstood your comment then I apologise. However, my sums would suggest that £200,000 would run out in 27 years' time.

    A 60 year old female has a 47% chance of living to at least age 87 (according to latest ONS data).

    Having a best case scenario of running out of money age 87 isn't one that would appeal to a lot of people.
    I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.
    • dunstonh
    • By dunstonh 11th Oct 16, 11:27 AM
    • 85,122 Posts
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    dunstonh
    I've been offered £7100, about 3.5%.
    Is that a quote from an IFA or the in-house scheme?

    But how to get it out of the pension scheme and into cash without being hit massively for tax?
    You dont. You would put it in cash and leave it in the pension. Although that would nearly always be a bad move. It actually introduces new risks that are less of an issue with investments. Remember risk is not on/off. It is a sliding scale. All options have some risk.

    Retirement income planning should be viewed jointly. It is household income that matters and what happens to it on death.
    Your wife likely has a stepped income need (more now, less at state pension age). So, in scenarios like that it would not be uncommon to use drawdown in the first period and switch to annuity later.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • OldBlade
    • By OldBlade 11th Oct 16, 11:49 AM
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    OldBlade
    To clarify. The £200K fund is hers. I separately have 2x final salary pensions amounting to £12K pa when I take them and £60K in money purchase. I plan to take these when I retire Nov 2018 at 65 when I will also get the state pension, confirmed at the full weekly amount.

    She is 60 and has retired and we are debating whether to leave her fund in the pension plan for now or turn it into an annuity now or make it a drawdown.

    We don't need the income at this point, we are just scared that annuity rates might drop even further!
    • PeacefulWaters
    • By PeacefulWaters 11th Oct 16, 12:12 PM
    • 5,070 Posts
    • 6,092 Thanks
    PeacefulWaters
    T
    We don't need the income at this point, we are just scared that annuity rates might drop even further!
    Originally posted by OldBlade
    They might improve.

    Will the income be more beneficial now or later?
    • Thrugelmir
    • By Thrugelmir 11th Oct 16, 12:17 PM
    • 51,279 Posts
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    Thrugelmir

    We don't need the income at this point, we are just scared that annuity rates might drop even further!
    Originally posted by OldBlade
    If Central Banks maintain their current policies highly likely. Devaluing debt is reducing the buying power of money.
    “A man is rich who lives upon what he has. A man is poor who lives upon what is coming. A prudent man lives within his income, and saves against ‘a rainy day’.”
    • dunstonh
    • By dunstonh 11th Oct 16, 12:48 PM
    • 85,122 Posts
    • 50,138 Thanks
    dunstonh
    We don't need the income at this point, we are just scared that annuity rates might drop even further!
    And they may go up as gilt yields begin to increase.
    Plus she will be older and there may be medical conditions.
    And dont forget that IFA arranged annuities are nearly always higher than in-house annuities.

    If you dont need the income, then leave the pension uncrystallised. That is a general rule of thumb. The money is in the most favourable tax position at this time.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
  • jamesd
    I've been offered £7100, about 3.5%. I'm worried about income drawdown. It would have to be invested somewhere and the overal value of the fund could drop in these uncertain times.
    Originally posted by OldBlade
    When you reach your state pension age you can start to defer claiming that to get guaranteed for life inflation-linked income. It's a good deal if in normal good health. Pays something over twice the amount that spending the same money on an inflation-linked annuity would pay and also increases the safe withdrawal rate from investments in drawdown.

    Around age 80-85 or so or if in less good health than OK annuities can start to become very competitive compared to drawdown. That's because at those sorts of times the cross-subsidy to those who live a long life from those who die early becomes significant enough to overcome the raw low rate issue.

    You have a fairly easy choice: take more than twice the income level, increasing with inflation, and accept the ups and downs of investment value, or guarantee for life half of the income level without inflation linking.

    Put somewhat differently: you can throw away half of your capital and buy an annuity now or keep the capital and see it go up and down instead, when it probably won't ever drop by more than the half you write off by buying the annuity. Throw away half because it only takes about half to generate the income using drawdown and state pension deferral.

    Viewed that way the chance of drops looks much more positive: beats the guarantee of a usually large initial loss that you get with the annuity!

    See Drawdown: safe withdrawal rates for much more on drawdown planning.

    The current recommendation if using the rules suggested there would have substantially lower than usual equity investments because the cyclically adjusted price/earnings ratio is currently high in many markets.
  • jamesd
    Just running those sums and putting it all in cash could be quite attractive.
    Originally posted by OldBlade
    One option that I like is taking the 25% tax free lump sum and investing that in P2P. It's easy enough to get 12% before bad debt these days and 5-6% is a doddle. Both with protection of some sort, either security typically in the form of property or cars or a protection fund.

    But how to get it out of the pension scheme and into cash without being hit massively for tax?
    Originally posted by OldBlade
    If she's not working she can withdraw up to her personal allowance tax free and should get started on doing that since it's an annual use it or lose it allowance. Can also reinvest in S&S ISA to continue to grow the money. Flexible ISAs allow placing the money into an ISA to use the annual allowance, withdrawing it for P2P then selling P2P and putting back into the ISA before the end of the tax year.

    Going beyond that, there are many countries with a tax treaty that means that you pay tax only in the country where you are resident. Some of those have a zero percent income tax rate on foreign pension income. Portugal is one which attracted quite a lot of press attention, since it offers an optional scheme with 0% rate. The 75% of a pension pot that is taxable is income. Even if taken all at once as a lump. So you can take out all 75% free of income tax anywhere. If you were to do this you'd need to avoid being tax resident in the UK for about five tax years, assorted timing fine details involved in the exact calculation. Return sooner than that and HMRC will treat the money as taken in the UK and tax you accordingly.

    So holiday in Portugal for at least six months then flitting around in say Ireland or elsewhere for the rest of the required time outside the UK is an option that would appeal to some. Maybe RV touring in the United States and Canada might appeal to some people for much of the time.

    VCT investing provides another way to get the money out without tax bill, just do enough buying of VCTs to eliminate say the basic rate income tax due and withdraw only up to the basic rate limit. Need to ensure that suitable VCTs are used.
    • AnotherJoe
    • By AnotherJoe 11th Oct 16, 2:44 PM
    • 4,177 Posts
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    AnotherJoe
    If I've misunderstood your comment then I apologise. However, my sums would suggest that £200,000 would run out in 27 years' time.

    A 60 year old female has a 47% chance of living to at least age 87 (according to latest ONS data).

    Having a best case scenario of running out of money age 87 isn't one that would appeal to a lot of people.
    Originally posted by HappyHarry
    My bad, it was a typo, i meant to put 30 but the 9 is right next to the zero !
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