Are there any safe options to an annuity?

Morven

Recently divorced, I have received part of my ex's pension fund as a settlement. I'm not complaining about the amount but about what I have to do with it.

I need some income as maintenance payments have now ceased and at 60 I'm only in a very low paid job. However, the small amount I would receive from an annuity seems absurd especially as I'm sure I won't live more than 20 years (if I'm lucky!)

If I were able to put the lot into a savings account - where the capital would be safe - take the interest plus say 1% of the capital, I could beat the annuity rates - still have 80% of the capital in 20 years (although obviously less income by then unless interest rates go up) and be able to leave the remainder to my children or charity - anyone except the insurance companies.

This seems like daylight robbery to me or am I being naive?

Is there anything else I could do? I saw a post by jenkothat sounded hopeful.

dunstonh

This seems like daylight robbery to me or am I being naive?

Do you think Gordon Brown would give upto 40% tax relief if you could just go out and spend it. Annuity rates should beat savings rates anyway so shop around.

Morven

You seem to have misread my post. I didn't say that savings rates would beat annuity rates.... I said plus 1%. I would not be just going out and spending it. I've never been lucky enough to pay 40% tax in my life and would in any case be paying tax on any money received.

I have already taken advice from an IFA and the best rate we could find worked out at 6%. I still maintain that I can find an interest rate of 5.15% on a savings account which with an extra 1% from the capital would beat the best annuity rate.

The point I am trying to make is that the capital would be protected and I would like to feel as if I had some safe option rather than giving it all away at the start. Incidentally, my husband's remaining pension will not be giving him this headache since it will be part of a final salary scheme.

dunstonh

I still maintain that I can find an interest rate of 5.15% on a savings account which with an extra 1% from the capital would beat the best annuity rate.

That 6% is fixed rate. Try and find out what fixed rate savings accounts are offering for the long term. Its much lower.

Whilst the annuity rate is not that much higher than current savings rates, the amount saved is at least 22% higher than you would have had if it had been in a savings account. So, in effect that has added another 1.3% to the annuity rate (7.3% vs savings rates).

I am not supporting the purchase of annuities as that is one of the disadvantages of pensions that I would like to see removed. However, you are not comparing like for like and are forgetting the tax relief that increased the pension at the start.

EdInvestor

Consider placing the pension in income drawdown where you leave the capital invested and take an income from it. To do this you will need to place the money in a SIPP. such as the low cost online one run by https://www.sippdeal.co.uk .

You will get a higher income using drawdwon than an annuity and will not lose the capital. However investing it in cash will not work, you will need to take calculated risks with at least some of the fund.

caveat_emptor

EdInvestor wrote:

.
You will get a higher income using drawdwon than an annuity and will not lose the capital. However investing it in cash will not work, you will need to take calculated risks with at least some of the fund.

Please let me know the SIPP investment where my capital is guaranteed and I'll have some. Also drawing down more than the equivalent annuity value will almost certainly run down the capital.

Morven

Thanks for the input. I know I'm just going to have to bite the bullet and go for an annuity..... I can't afford to hang around. That SIPP website is just too scary for me.

I would actually be happy to take a smaller amount of money than an annuity - say just interest - if the capital could be left somewhere safe and I was able to look at other options in the future. It's the terrible finality of it all. I'm not trying to screw the government out of their taxes, I just don't want to be screwed by anyone else. The lack of real choice is the problem.

EdInvestor

That SIPP website is just too scary for me.

Why?

I would actually be happy to take a smaller amount of money than an annuity - say just interest - if the capital could be left somewhere safe and I was able to look at other options in the future.

But that's exactly what the Sipp enables you to do.You transfer the money in and it goes into the a cash account, (operated by Bank of Scotland) which pays you around 3.5% interest income.

You can invest the capital later if you want, at your leisure .

Nothing could be simpler.

dunstonh

Income drawdown is a risk option and should not be considered safe. Any financial adviser recommending it as a safe option would face sanctions when found out.

However, there are degrees of risk and if there is sufficient income elsewhere then some investment risk could be considered. However, if you dont know what you are doing, then it is certainly not a DIY option.

Paul_Herring

From the initial post:

Morven wrote:

Recently divorced, I have received part of my ex's pension fund as a settlement. I'm not complaining about the amount but about what I have to do with it.

[...]

If I were able to put the lot into a savings account - [snip]

Just a question from me to Dunston (or any of the other IFA's out there reading) - does the divorcee actually get their part of their partner's pension fund as 'cash in hand' as it were to do with what they will, or must it be put into a fund belonging to the divorcee? If the latter isn't the case, this must be one hell of a loophole waiting to be exploited...

dunstonh

Just a question from me to Dunston (or any of the other IFA's out there reading) - does the divorcee actually get their part of their partner's pension fund as 'cash in hand' as it were to do with what they will, or must it be put into a fund belonging to the divorcee? If the latter isn't the case, this must be one hell of a loophole waiting to be exploited...

A pension sharing order would give that part of the pension to the partner. It would remain within the pension. i.e. a £100k personal pension where a 75% sharing order is made would see £75 moved into a pension in the partners name. It is not made available in cash.