pensions

brugger

Hi. I am wondering if any of your readers can tell me where I am wrong on the subject of pensions.

Suppose I have a pension pot of ,say for simpicity, £100,000. If I invested this in bonds or did relatively simple things on the stock market with the money I could make at least 5%. After all the pension providers give you illustrations based upon growth of 5%, 7%, and 9%. So let us assume that I made only £5000 from investing it.

The alternitive is an annuity. On a single life policy this would give me £7000 a year. So I would be better off by £2000 a year. This would take 50 years before I would be better off ( unlikely I know), by taking out an annuity.

As a average of death of a male is approximately 82 I would only have eaten up £34,000 leaving, on very worst case scenarios £ 66,000 to go back to the insurance company.

It seems to me that buying a annuity is for the birds. But can anybody see anything wrong with the logic of the argument?

Arthur

coldstar

I wondered the same thing myself but have come to the conclusion that annuities do make sense. But you have to check the figures carefully to get the right one!

I think the main problem with your argument is that the annuity is guaranteed so the company providing it has to take very conservative investment decisions and is very unlikley to find a 5% return combined with the security required for a long term (~5 year) guaranteed return. 2.5% to 3% is probably closer to the mark.

Also if you take £2000 a year out of your £100000 the "capital value" of your annuity will be falling every year.

Using my old trusty HP 12C financial calculator I worked out that if you assume a return of 3% on an initial investment of £100000 and pay out £500 per month (£6000 per year) you get about 23 years of payments before the money runs out. So if you start at 65 and live more than 23 years the provider of your annuity starts to lose money. If you live less than 23 years the provider gets some profit. The trusty old 12c is worth its weight in gold for doing this sort of calculation (and scares the IFAs when I run their figures through it in front of them!:rotfl:)

margaretclare

You might be better posting this on the Pensions board.

An alternative to an annuity can be a SIPP.

gfplux

Hello Brugger,
I have been retired some time and have a mixture of the things you mention.
I would make the following observations:-

* The illustrations of 5%, 7% and 9% you are shown are figures dictated by the Government Financial Agency. It has nothing to do with real life, but as a salesman wants to put some figures in, the Authority allow them these %.

* As someone who has cash to invest I know it is very hard to get a 5% return on all your money. For safety you surely would not put your entire "pot" with one company. Remember many of the 1, 2, 3 years offers today mean you get your interest at the END of the period. What do you live on in the meantime.

* Do not underestimate the calm, warm, comfortable feeling you get when you see the annuity drop into your bank month after month, year after year,

Good Luck, looking forward to hearing what you think.

Savvy_Sue

margaretclare wrote: »

You might be better posting this on the Pensions board.

Indeed.

MOVING THREADS FOR BETTER RESPONSES

Hi, Martin’s asked me to post this in these circumstances: I’ve asked Board Guides to move threads if they’ll receive a better response elsewhere(please see this rule) so this post/thread has been moved to another board, where it should get more replies. If you have any questions about this policy please email [EMAIL="abuse@moneysavingexpert.com"]abuse@moneysavingexpert.com[/EMAIL].

dunstonh

Investments are subject to fluctuating returns and your capital is at risk. Annuities are guaranteed for life. Guaranteed options typically pay less (in good times) than those without guarantees.

Annuity rates currently mean that it will take about 8 years for you to get back the net contributions that you paid into the pension. If you have the risk profile, you can choose to delay the annuity purchase and use Income Drawdown instead. Or you can buy an annuity with a value protection pay out on death (if you die before age 75 they will pay out a sum that equates to the value minus what has been paid out already minus a tax charge).

brugger

Hello,

I thank all of you who replied to my previous message.

Quite simply annuity or a SIPP? Which is it to be.

Or at the end of the day is it simply a question of attitute to risk?

A.

brugger

dunstonh wrote: »

Investments are subject to fluctuating returns and your capital is at risk. Annuities are guaranteed for life. Guaranteed options typically pay less (in good times) than those without guarantees.

Annuity rates currently mean that it will take about 8 years for you to get back the net contributions that you paid into the pension. If you have the risk profile, you can choose to delay the annuity purchase and use Income Drawdown instead. Or you can buy an annuity with a value protection pay out on death (if you die before age 75 they will pay out a sum that equates to the value minus what has been paid out already minus a tax charge).

Hi, Thanks for your comments.

I am a little mysterfied by the 8 years figure. With a pot of ,say,100,000 how does this equate to the 8 years. Because one would only get about £7000 which aven my maths only gives £56,000 .

Can you help?

Arthur

dunstonh

With a pot of ,say,100,000 how does this equate to the 8 years.

You havent paid £100k into it though. You get tax relief on your contributions and you take 25% back. Plus, you had growth. So, from the point of view of getting your money back that you paid, it tends to be around 8-12 years (depending on annuity rate you can get).

e.g.

£3600 contribution. £2880 is what you pay. Ignore growth. You take back 25% of the £3600 and that makes it £900. So, the net outlay into the pension that is effectively lost to provide an income is £1980. £2700 at an annuity rate of 6.5% = £175.50. That £1980 / 175.50 = 11 years. If you put a bit of growth on that then it comes down to around 8 years or less potentially.

Quite simply annuity or a SIPP? Which is it to be.

Or at the end of the day is it simply a question of attitute to risk?

Attitude to risk is the key thing here. Can you afford investment fluctuations to impact on your income?

brugger

Hi,

I was talking about ,say,a net cash sum of £100,000 to invest in a pension after the 25% . So I would literally give whoever is going to get my money £100,000.

Cheers,

Arthur Brugger

MikeJones_2

Hi brugger.

Other things to consider (listed in no particular order):

- Death benefits
- Taxation
- Guarantees
- Flexibility
- Risk
- Your health (current and past)
- Lifestyle issues
- Family history (hereditary health)
- Enhanced/impaired life annuities
- Charges

Just food for thought, but I suspect you've already considered these?

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.