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    • Liffy99
    • By Liffy99 16th Oct 16, 9:58 AM
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    Liffy99
    Life expectancy and pensions
    • #1
    • 16th Oct 16, 9:58 AM
    Life expectancy and pensions 16th Oct 16 at 9:58 AM
    I always thought pensions were based on average life expectancies (with the odd exceptions at times for those with verifiable conditions). I have a small personal pension pot and the annuity forecast for it means that I need to live until 98 just to break even (ave life expetancies for me as a 60 yr old is in the low eighties I think).
    How can this be right ? Surely annuities must be calculated on that average so 50% or people will die earlier (leaving funds with the pension scheme) and 50% later - balancing it out.
    They've already fleeced us of thousands in fees after all . . . .
Page 1
    • hugheskevi
    • By hugheskevi 16th Oct 16, 10:35 AM
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    hugheskevi
    • #2
    • 16th Oct 16, 10:35 AM
    • #2
    • 16th Oct 16, 10:35 AM
    I always thought pensions were based on average life expectancies (with the odd exceptions at times for those with verifiable conditions).
    Life expectancy is important in annuity pricing, but it is not the only consideration. Gilt and bond yields are also very important. Cost of risk (eg more uncertain longevity risk for annuities purchased by younger individuals, inflation risk for index-linked annuities, etc) are impact on pricing.

    I have a small personal pension pot and the annuity forecast for it means that I need to live until 98 just to break even
    What type of annuity? In particular, what indexation and survivor benefits apply and have you taken account of these if they do?

    I have a small personal pension pot
    The smaller the pot, the more significant the fixed costs of administering the purchase and payment of the annuity are, reducing the rate payable.

    ave life expetancies for me as a 60 yr old is in the low eighties I think
    Median life expectancy for male aged 60 in UK in 2016 is 87.36

    Surely annuities must be calculated on that average so 50% or people will die earlier (leaving funds with the pension scheme) and 50% later - balancing it out.
    Plus expenses to provide them, pay them, costs of capital reserve, etc. Studies have shown flat-rate annuities are expected to return about 94% of initial capital, although index-linked annuities return much less, about 70-75%. Expected return for smaller pots is lower, around 87%.

    They've already fleeced us of thousands in fees after all . . . .
    The annuity is separate to the pension. Annuities can (and often should) be purchased from a different company to that which provides the pension.
    • Linton
    • By Linton 16th Oct 16, 11:42 AM
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    Linton
    • #3
    • 16th Oct 16, 11:42 AM
    • #3
    • 16th Oct 16, 11:42 AM
    .... I have a small personal pension pot and the annuity forecast for it means that I need to live until 98 just to break even.....
    Originally posted by Liffy99
    This seems unlikely to me. Perhaps the forecast is based on current prices and an assumed inflation rate or it assumes an index linked annuity. Either way inflation will mean that the break even point in cash terms is much better than an age of 98. The current market rate for a fixed annuity for someone aged 60 is about £4200 for each £100,000. This would imply a break even point of of about 24 years, so an age of 84.

    If you want an annuity you are advised to seek an open market option whereby you can buy an annuity from any provider. You can often get a much better deal from someone other than the company currently holding your pension.

    PS the FT shows annuity rates of £4049 for someone aged 60 - break even at 84.7.
    Last edited by Linton; 16-10-2016 at 11:50 AM.
    • dunstonh
    • By dunstonh 16th Oct 16, 5:52 PM
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    dunstonh
    • #4
    • 16th Oct 16, 5:52 PM
    • #4
    • 16th Oct 16, 5:52 PM
    I always thought pensions were based on average life expectancies (with the odd exceptions at times for those with verifiable conditions). I have a small personal pension pot and the annuity forecast for it means that I need to live until 98 just to break even (ave life expetancies for me as a 60 yr old is in the low eighties I think).
    Is that the in-house annuity pricing or the open market option via an IFA pricing? (the latter nearly always being much higher)

    Most annuities breakeven in the low to mid 80s. Enhanced or impaired annuities can be quicker. If yours is coming out at 98 then perhaps it means you have a younger spouse (and have 100% spouse option) or it is an indexed annuity and you have missed off the indexation. Or you have built in high death benefit options that are costly in terms of income reduction but would result in lump sums payable on death outside of the estate (useful for those that want to reduce IHT).
    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
    • #5
    • 16th Oct 16, 11:49 PM
    • #5
    • 16th Oct 16, 11:49 PM
    I have a small personal pension pot and the annuity forecast for it means that I need to live until 98 just to break even
    Originally posted by Liffy99
    Probably means that it's an inflation-linked annuity.

    This probably doesn't make any difference to you in practice because state pension deferral is usually the method that provides highest income for the money. Beyond what is achievable that way income drawdown is also likely to pay more than an annuity.

    Using a value that assumes you're a daft income buyer doesn't really do you much good. Of course there are exceptions, like those ineligible for the UK state pension or with shorter life expectancies than usual.
    • AnotherJoe
    • By AnotherJoe 17th Oct 16, 12:54 AM
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    AnotherJoe
    • #6
    • 17th Oct 16, 12:54 AM
    • #6
    • 17th Oct 16, 12:54 AM
    I always thought pensions were based on average life expectancies (with the odd exceptions at times for those with verifiable conditions). I have a small personal pension pot and the annuity forecast for it means that I need to live until 98 just to break even
    Originally posted by Liffy99
    So don't take an annuity then.
    • Liffy99
    • By Liffy99 17th Oct 16, 2:57 PM
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    Liffy99
    • #7
    • 17th Oct 16, 2:57 PM
    • #7
    • 17th Oct 16, 2:57 PM
    It's a fixed rate annuity with no bells or whistles, just me and not index linked. Provider does not offer options such as drawdown etc so its either take the annuity on offer, with or without lump sum or move it elsewhere. It's also tiny (£18k pot although I've another over £100k elsewhere).
    Costs of administering it were mentioned above - so what have all the fees and charges up until now been for then ??? We are so ripped off here in the UK.
    State pension deferral probably won't be for me as there would be too much of a wait (60 now, State pension at 66, so already 6 years).
    Life expectancy of a 60yr old is 87.36 ??? Where did that come from (I'll go check).
    I have serious CVD issues (heart attack, bypass etc) which may help - very much following the genes on my father's side ! May be able to get a better deal on that basis.
    • dunstonh
    • By dunstonh 17th Oct 16, 3:18 PM
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    dunstonh
    • #8
    • 17th Oct 16, 3:18 PM
    • #8
    • 17th Oct 16, 3:18 PM
    We are so ripped off here in the UK.
    No we are not. We are one of the most competitive in the world and others look to us.

    Life expectancy of a 60yr old is 87.36 ??? Where did that come from (I'll go check).
    If good health and male, then at 60, 3 in 4 will live to 85. half will live to 93 and 1 in four will go past 99. Average health (high blood pressure, cholestoral etc) will take around 3 years off those.

    Women will live around 2 years more than men.

    I have serious CVD issues (heart attack, bypass etc) which may help - very much following the genes on my father's side ! May be able to get a better deal on that basis.
    It would be best to find out as you are taking the lowest benefit option (the in-house annuity) and saying we are ripped off the in the UK without actually checking the best options.

    State pension deferral probably won't be for me as there would be too much of a wait (60 now, State pension at 66, so already 6 years).
    18k pot is tiny. What about taking it as a lump sum. Maybe in the new tax year when your income is going to be less (so less tax)?
    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.
    • hugheskevi
    • By hugheskevi 17th Oct 16, 3:52 PM
    • 1,833 Posts
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    hugheskevi
    • #9
    • 17th Oct 16, 3:52 PM
    • #9
    • 17th Oct 16, 3:52 PM
    [QUOTE]Costs of administering it were mentioned above - so what have all the fees and charges up until now been for then ???/QUOTE]

    You are free to have whatever pension provider you wish, and whatever annuity provider you wish. Pension charges pay for management of the pension and investment.

    Annuities don't have explicit charges, so the charges are bundled up into the rate offered. Whatever charges you previously paid for the pension are irrelevant, especially if you take an annuity from a different company than the pension was held with.

    Life expectancy of a 60yr old is 87.36 ??? Where did that come from (I'll go check).
    UK Life Tables, produced by National Statistics. The link to the data is in the original answer.
    • kidmugsy
    • By kidmugsy 17th Oct 16, 4:13 PM
    • 8,502 Posts
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    kidmugsy
    A wonderful demonstration of the extent to which people are self-rippers-off.
    • AnotherJoe
    • By AnotherJoe 17th Oct 16, 6:03 PM
    • 4,148 Posts
    • 4,175 Thanks
    AnotherJoe
    It's a fixed rate annuity with no bells or whistles, just me and not index linked. Provider does not offer options such as drawdown etc so its either take the annuity on offer, with or without lump sum or move it elsewhere. It's also tiny (£18k pot although I've another over £100k elsewhere).
    Costs of administering it were mentioned above - so what have all the fees and charges up until now been for then ??? We are so ripped off here in the UK.
    State pension deferral probably won't be for me as there would be too much of a wait (60 now, State pension at 66, so already 6 years).
    Life expectancy of a 60yr old is 87.36 ??? Where did that come from (I'll go check).
    I have serious CVD issues (heart attack, bypass etc) which may help - very much following the genes on my father's side ! May be able to get a better deal on that basis.
    Originally posted by Liffy99
    You most certainly will and you absolutely should not even have bothered asking for a bland generic annuity quote. You should be asking a specialist (though frankly if its that little I'd be tempted to draw it down over 2 or three years (to minimise tax) anyway.
  • jamesd
    I have serious CVD issues (heart attack, bypass etc) which may help - very much following the genes on my father's side ! May be able to get a better deal on that basis.
    Originally posted by Liffy99
    You'd get a much better annuity rate on that basis.

    While the life expectancy at 60 is correct in general, it's not correct for you and that reduced life expectancy can support a significantly higher annuity pay rate because the company knows that they are likely to have to pay out for fewer years.

    The catch is that the pot size is moderately low so it might not be a particularly great rate because costs would have to be included in the quoted rate and there might also be fees to pay. Dunstonh's observation that it might be worth taking the money as a lump sum or two or three over several years to spread the tax cost and maybe get it all out within your personal allowance is an interesting one.
    • atush
    • By atush 18th Oct 16, 11:22 AM
    • 15,296 Posts
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    atush
    And then get an enhanced annuity from your 100K pot using your health concerns.

    Given the skill involved with this (esp the haggling and knowing who is best to go to), good idea of getting a quote from an IFA for this service?
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