Alternatives to Annuities

Martin_Stevens

I'm very pleased to see that the govt. has dropped the requirement for pension funds to be invested in an annuity on retirement. I never understood why after saving for a pension I had to risk losing most of my money if I die early.

I'm 55 and will get a final salary pension from my first employer at 60, plus personal pensions from more recent employers whenever I decide to take them. Not sure if my final salary pension + state pension will take me to this new £20K threshold.

I'd like to invest my personal pension funds on retirement in some non-stock market fund that pays interest with no risk to capital, and which I can draw on as needed. Basically just a decent building society savings account for relatively large amounts.

Will that be possible under these new rules:
i) If I have £20K+ from my final salary pension + state pension
ii) If I don't have that much

Not looking for very detailed personal advice at this stage (guess I'd need to consult someone for that) but just an educated steer.

Many thanks

MARTIN

dunstonh

I'd like to invest my personal pension funds on retirement in some non-stock market fund that pays interest with no risk to capital, and which I can draw on as needed. Basically just a decent building society savings account for relatively large amounts.

What makes you think that would be a good option? Annuity option is likely to be more cost effective.

The revised rules really affect the over 75s the most. Unsecured income rules for under 75s are largely the same with just a bit of tweaking. The £20k limit is only whether you would be allowed to drain your fund at a higher rate. Something you dont appear to want to do.

Loughton_Monkey

The first thing you need to know is that only SIPP's allow 'cash' investments. The variety and value of such cash funds is very small and miserable. See other threads on this subject.

More importantly, I'm not sure that investing in 'steady cash' would give you any more than a fixed annuity. Annuity rates take into account your mortality and various investments such as long term bonds (quite low interest).

Wait for other opinions, but as far as I can see, your strategy would give you the following pros and cons:

1. If you lived to average age, and drew down exactly the income you had been quoted from a normal annuity, you would be reducing your drawdown fund to about zero by the time you reached average lifespan (at the time of drawdown commencement).

2. If you died later, i.e. outlived normal mortality, an annuity would have kept on paying. But you will have zero income.

3. If you die before normal lifespan, then a drawdown arrangement would provide a small fund for your spouse. Otherwise, it would be taxed at 55% and be payable to your inheritors.

It is normally perceived that drawdown is 'good' because one can expect better investment returns on the fund than would be implied within a fixed annuity. Once you 'invest' in rather low paying savins accounts, I suspect most, if not all, the advantage disappears.

Cautious_Investor_3

dunstonh wrote: »

What makes you think that would be a good option? Annuity option is likely to be more cost effective.

One reason my be that the OP prefers the various different options available on death that an income drawdown plan gives. Furthermore she may require flexible income which is not exactly achievable from an Annuity.

I have seen many people go into income drawdown via a SIPP and use a series of deposit accounts and structured products to provide a low risk series of investments. There are a variety of reasons why someone may feel this is appropriate.

The Cautious Investor

Cautious_Investor_3

Loughton_Monkey wrote: »

3. If you die before normal lifespan, then a drawdown arrangement would provide a small fund for your spouse. Otherwise, it would be taxed at 55% and be payable to your inheritors.

QUOTE]

We don't know if the fund would be 'small' or otherwise, it could have risen in value if income taken and charges made were less than the returns generated.

Furthermore if the spouse takes the lump sum following the death or their husband or wife then there will still be a 55% tax charge. Of course this could be delayed by the remaining spouse continuing to take an income or indeed purchasing an Annuity at that point.

The Cautious Investor

dunstonh

One reason my be that the OP prefers the various different options available on death that an income drawdown plan gives. Furthermore she may require flexible income which is not exactly achievable from an Annuity.

sure, drawdown gives flexibility but if you are going to use cash then you could be losing more money than you gain on the annuity. The cross subsidy and the ability to have value protect on the annuity should improve the returns over cash whilst still giving a return of capital on death.

Cautious_Investor_3

dunstonh wrote: »

sure, drawdown gives flexibility but if you are going to use cash then you could be losing more money than you gain on the annuity. The cross subsidy and the ability to have value protect on the annuity should improve the returns over cash whilst still giving a return of capital on death.

Sure, one could also argue that a fixed term annuity might also be a way forward.

I'm just not convinved buying an Annuity in the unprecidented economic circumstances that we find ourself in (i.e. QE, which we have never had before and historically low interest rates) is the right thing to do.

A fixed term annuity or indeed income drawdown with investments matched to attitude to risk, would delay the date at which an Annuity is purchased, when who knows, rates may have rise or the OP may be in worse health and qualifies for an enhanced annuity.

The Cautious Investor

bristol_pilot

Do the new rules mean that anyone with income in retirement (for example, from a final salary scheme from a previous employer) of £20k can cash in any money saved in a separate money purchase or AVC and just spend the capital? Seems almost too good to be true. I am in my 40s and have already accrued pension from NRA of more than £20kpa and I also have £100k in a money purchase scheme. With 20 years to go before retirement the latter could easily get to £500k. Will I be able to draw out half a million pounds on my 65th birthday and blow the lot on Werther's Originals?

Linton

Minus income tax.

bristol_pilot

Fair enough, annuity income is also taxable. I have come to regard compulsory annuities as a form of legalised theft. You get an income little greater than could be obtained in the building society and in return give away the capital. To be able to include return of capital as part of my retirement income allows a lot of flexibility and is a great benefit.

Linton

bristol_pilot wrote: »

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You get an income little greater than could be obtained in the building society and in return give away the capital.
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Dont think that's correct. For a level annuity at 65, you currently get about 6.3%. About 50% better than building society FR interest.