Annuity and RPI

cavework

OK .. honest question..
My husband is 60. We are selling our home and renting . He has a pension pot of £116000 to buy an annuity. He has already taken the tax free lump sum so it,s not in the equation.
He has been quoted a lifetime enhanced annuity due to ill health, guaranteed for 5 years at £6,171.76 per annum payable monthly in advance.
On the information provided if we take a level basis annuity it is increased to a static £8,803 per annum.
We have calculated that at 60 if we take the level basis allowing for a minimum of 15 years life expectancy it is worth more than an RPI linked annuity.
The commision on setting this up is £2,920.14 2.5% .
We are in a position where we really need to use an annuity as added income on a monthly basis...
Can anyone tell me what is the best option please?

cavework

:oOK sorry dumb question.

zygurat789

Consider a few more options

Are these the best quotes.
If he is in ill health what happens to you and the annuity when he dies? Get a joint life quote.
Don't forget the one of best index linked pensions is the state retirement pension so you will have some protection against inflation if you choose the level basis annuity.

Just a thought, hope it helps a little.

cavework

Thanks Zygurat,
the problem is I am 11 years younger than my husband and this does affect the joint life quote ..and not in our favour. We have been advised to take the 5 year guarantee.
I am not the brightest when it comes to financial investment.. blimey our track record shows that but this time I am determined to get the best deal for our financial circumstances..
It maybe too much too late but its all we have left and I won't be ripped off anymore..
Sorry just an angry consumer with no where left to go!:rotfl:
xx

exil

Unfortunately you have to take a view on future inflation, and how long you will both live, and crystal balls are in short supply.

3% inflation - you have to live to 85 to be better off with the index linked pension. Even though at age 75 your index linked pension will be bigger, you by then have had the benefit of 15 years at a bigger pension and it takes another 10 years before the effect of this is cancelled out.

If inflation is 5% the break-even point is age 75. On the other hand at 1% you would still be better off with the level pension even at age 100.

A purely personal view is that I'm more likely to make good use of the extra money in my 60s and 70s than in my 80s and 90s, when I might be no longer able to drive, play sports, go on active holidays etc, so would prefer to get the money sooner rather than later. On the other hand, the index linking is a hedge against a future heavy dose of inflation. I don't think anyone can advise you here really, it's a personal choice.

cavework

Exile .. thank you we have £116000 invested and our best return I now think is a level annuity. We are selling our home and renting. My Husband can still earn extra
All our debts will be paid off if we sell now with a bit of equity left over, I am still earning and will hopefully continue for at least another 10 years.
We have had 2 years of trying desperatley to keep up with repayments, our kids are 23 and 18.
We have had to be honest and say it's time to think of ourselves and not the kids..23 year old is well up for it as he says it time he left home .. 18 year old is sulking..

sandsy

The commission rate of 2.5% is reasonably high. The market average for annuities is 1.5%. I know it won't make that much different to the quote but every little helps.....

cavework

Sandsy Thanks..like you say 'every little helps' and without having this site to come and ask the questions I might as well write a blank cheque to our financial advisor.
If I had been able to access forums like this in the 1980,s when I was really young and financially daft things might well be different for us in 2010.
We are lucky .. we still have the option of getting out of debt and having a bit left over. Most people do not get into debt willingly and when they do it is usually due to things happening that are out of their control and could not have been forseen.
We live and learn but my sons have taken an active interest in MSE and oldest has used the advice to save and reclaim money, more than once in the last year

EdInvestor

cavework wrote: »

Exile .. thank you we have £116000 invested and our best return I now think is a level annuity.[/qyote]

I assume this is the remainder of the pension from which you have taken the tax free cash and that it is now invested in an income drawdown plan. What is it invested in exactly? What charges are you paying and what level of income are you receiving from the drawdown? Who is the provider?

Why do you think now is the time to annuitise? Rates have fallen dramaticallly in the past year and possibly so has the invested pot.Would it not be bettter to wait a while so losses can be recouped?You can after alll draw 120% of the annnuity rate in income from a drawdwon, which may be close to the enhanced rate you are being quoted.Where ill health is an issue it doesn't make sense for you to lose the capital especially to solve a short term problem.

How much did you pay the IFA to get into the drawdown?Was it 3% or more?If so 2.5% on top to annuitise the remaining pot is ridiculous.

Sellling the house may however make sense if you can get a good price and reduce outgoings, plus pocket some equity.

How much state pension can your husband expect in 5 years?How about you, later on?

Get a forecast here:
http://www.direct.gov.uk/en/Pensionsandretirementplanning/StatePension/StatePensionforecast/DG_10014008


Don't try to do too many things at once, it causes mistakes.Take your time.:)

cavework

Edinvestor .. I have sent you a PM with the details .
Thank you ..
we are now taking a deep breath and a step back before making any final decisions

MikeJones_2

Hi cavework,

If you want to take some time and investigate further in the comfort of your own home, try the following website which looks at enhanced annuities. It lets you choose a whole host of options to see what effect each one has on your income. Of course, one of the main benefits is you can try before you buy!

http://www.onlineannuityplanner.com/PRS/CompareAnnuities/default.aspx

Other things for you to consider:

- The higher your income the more tax you might pay.

- A higher initial income in certain circumstances may restrict the amount of other benefits you might be eligible to claim.

- If you take the higher annuity, will you invest it and what interest would you expect to receive from it?

Of course there are many more considerations which is why a good IFA is worth his/her weight in gold.

Given that you've taken the time and trouble to conduct your own background research I'd like to suggest you read the following report about how income and expenditure changes during the different phases of retirement.

The report looks long, but it is written in plain English and easily diggested. Hopefully you'll enjoy a longer retirement(!) and time spent now is a worthwhile investment.

To whet your appetitite here are a few interesting snippets for you to ponder which I've extracted from the report:

Expenditure variations across household units indicate that:

· Households with more than one person in them are more likely to spend money on goods associated with leisure activities.

· Single pensioners may have more income needs for care inside or outside the home than pensioner couples.

· Male and female pensioners have different spending patterns across categories of expenditure including personal goods and services, transport, motoring, clothing and footwear.

As well as varying across household units, income needs also vary during retirement due to a combination of needs, expectations and spending preferences.

· Pensioners tend to spend a large proportion of income on leisure and recreation in the early years of retirement (ages 65 to early 70s).

· Pensioners tend to decrease spending during the middle years of retirement (around ages 75 to 85) as a result of losses in mobility.

· Spending tends to increase again around age 85 as a result of the need for health related expenditure.

· Pensioners tend to reduce spending once more around age 90 as the need for spending on health, fuel, food and housing becomes paramount but expenditure on other goods drops off as a result of either mobility, preferences or the need to conserve income.

See:

Retirement income and assets: do pensioners have sufficient income to meet their needs? (Pensions Policy Institute) (pdf)

Hope that might help? (Mind coming back and sharing with us what you choose and why?)

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.