Annuity query

gibblywich

Can anyone help - I'm 55 and forced into buying an annuity or similar as my husband and i are divorcing and the pension is being split.
I could go for a flat rate one but it won't protect against inflation, or an escalating one that gives a lousy return at the start and will take years to 'catch up' with that amount I would get for a flat rate one.
Income Drawdown pensions seem a bit risky as this will be my only income.
Any tips greatly appreciated

Linton

Are you being forced into buying an annuity now?? If not, dont.

I would suggest you need to do some planning:

As a start...

1) How much income do you need to have what you consider an "acceptable" standard of living?
2) How much income do you need to have what you consider a "basic" standard of living?
3) How much longer can you work, and how much would you have saved by the time you need to retire.

Ideally, I would say, a "basic" standard of living should be covered by index linked income (mainly state pension). Anything above that could reasonably be fixed income or possibly drawdown.

Only once you have made the plan can you, or anyone else, come to a reasoned view on what sort of annuity to take.

rabbitmumu

why and who forced you to buy an annuity policy? If the court decides you get 50%, can't you simply put the 50% fund value into a personal pension (i.e. transfer to) under your own name?

Income drawdown is not really available unless your fund has over 200k. given the current economic condition and you are still very young, it's better to wait and see by choosing the income drawdown option if you have the fund.

I am very curious as to why you have to buy an annuity now. but if that's the only option, then can you get 1/4 tax free cash too?

Index linked or flat - you need to have a guess in terms of how long you are likely to live (are you in good health, lifestyle, your parents' ages etc etc). The other question you need to ask is do you need the money now? i.e. if you still have other financial commitments that you need the higher flat rate pension? Also, please also consider your own savings and pensions etc etc.

gibblywich

Many thanks for responses.
As this money is from a pension sharing order, I will need to tell my solicitor where the money is going.
I can't have any tax free lump sum as my (ex) husband already took that as part of his retirement option.
So I have to place the share into a government approved pension scheme. The financial advisors i have seen so far have suggested only annuities or draw down. I am totally reliant on income from this as my salary is useless

jamesd

Using income drawdown does have more risk than an annuity but also the potential for higher income. It's often a good option at younger ages like yours. There's a broad range of mixtures of investments that can be used so it's not all one level of risk with lots of big ups and downs in capital value and the income level is fairly steady.

A level annuity is completely unsuitable for someone who is 55 unless you are in very poor health. Normal life expectancy for a woman these days is to around something like 87 years old at age 55 so you'd be looking at half of women living more than 32 years. After 32 years of 3% inflation a level pension would be worth about 40% of what it is today.

What is the rough value you have, the rough job income and the range of income for bare minimum living to reasonably comfortable living and on to good living? Bare minimum would mean things like few holidays, no or cheap car, just essential utilities, food and basic clothing. That's something that you might want to cover with job plus an annuity so that the basics are taken care of.

You could then use the income drawdown option for the rest. Or you could use an annuity to get you closer to the reasonably comfortable level and drawdown above that.

Cautious_Investor_3

Hi

It is important to know what size fund you have as Income Drawdown is often unsuitable for smaller funds.

The Cautious Investor

rabbitmumu

I now understand why you were only "given" 2 options - possibly because you told them you actually need the money right now. Whether your not your ex is already receiving his pensions, it should still be perfectly ok to transfer your share of the fund into any other approved schemes and then take it out as an annuity when you are ready as it looks like it's a money purchase scheme your ex has got.

As mentioned previously, the general "rule" is that given you are only 55 (and assume you are in good health), it's really not advisable to tie yourself to purchase an annuity especially at this current economic situation. But if you actually need the money right now, then it's something different.

Income drawdown is possibly a better option which gives you more flexibility and you can wait for 10-20 years to commit yourself to an annuity. Who knows what the econ situation will be and the rules may change by then.

I guess others and I may also have this "question" in our minds (sorry for being nosy) - if you have over £200k fund for an income drawdown, you possibly also have other money/assets from court? If so, there's no rush to commit yourself with an annuity? If your fund is under £200k, then I am slightly concerned with the advise you are being given as there aren't many providers who are willing to provide income drawdown policies for low fund values.

gibblywich

I'm not in particularly good health but hopfully won't leave this world for some time. The pension I will be sharing is from company one. They wont allow me to keep it with them so I have to invest elsewhere. It's sizeable and will be around half a million. That sounds massive I know but it doesnt buy a huge amount if i go for an RPI linked annuity. My salary is less than £10K.
As I am terrified of taking risks the drawdown option put me off as I would be reliant on making good investments and would have to employ some kind of management company to look after things for me. At least thats what the financial adviser said.
I am going to get further advice from another IFA and see what they reckon

rabbitmumu

I see..

Yes it's fair that the company won't let you keep your share with them, but I am fairly sure that you can simply transfer that amount to another personal pension arrangement and keep the money in there until you are ready to buy an annuity or decide to have an income drawdown. You may wish to double check with your IFA that having a pension "sitting there until you are ready" is also an option.

For argument's sake, if you don't actually need the income now, having a pension "just sitting there" for a few years is similar to you having an income drawdown in the first few years - i.e. you will still need to decide what investment you wish to invest in (e.g. on the safe side, more on bonds/ cash and less on equities) . But the income drawdown option is where you can at least take some cash out and leave the rest to invest, and then when the annuity rates are better, you can then commit yourself to purchasing an annuity (which can't be reversed once you have decided)

It all depends on whether you need the cash now, if so, how much? (i.e. can the income drawdown provide you with enough cash initially).

I am thinking that if you take a flat annuity now, you can probably take about over £25k a year plus your £10k salary. If that's what you need, then obviously that's an option. But if you don't actually need that much, then you will also need to think where you are going to invest the income too.

jamesd

To give some idea, with a half million pot you could reasonably expect that income drawdown could pay around £30,000 a year (6% of capital) or £25,000 is invested more cautiously than usual. The income stays fairly constant, the capital value goes up and down over the years. How much depends on the investments, normally it's a mixture and 20% up and down movement would be easy enough to arrange for the whole amount, using a combination of share funds, corporate bond funds, property funds, savings account deposits and perhaps some other things.

With that pension pot size it's easy enough to buy a combination of index-linked annuity for core needs and use drawdown for the variable part. You're easily into the amount of money where drawdown is a good idea.

Since you write that you have some health issues, do be sure to ask about "enhanced" annuities. Those pay more than standard annuities, how much more depends on the nature and severity of what your health issues are. It's one time when it's good to be more sick, since that gets you more money from an annuity.

The plans of the government to allow people access to their pension pots may affect you. If you were to buy level annuities worth a total of £18,000 under the proposed plans you would be able to draw the rest of the money out as income, without limit. It would be subject to income tax, though, so if you took out a lot more you'd pay 40% or even 50% tax if you took enough to go over £150,000 of income in one year. The plans aren't yet final but we should learn more in the budget.

gibblywich

many many thanks for this information. In answer to one of the questions: I do need an income straight away as the only other source of money is my salary of <£10K.
I won't be scared of the drawdown route until I've explored it thoroughly. My trouble is that I don't always trust advisers of anything!!
I've had a few bad experiences and don't want to mess things up.
Knowing who is truly independant and who favours particular insurance companies is what I worry about. One adviser was really plugging a product by a large company. He said he knew someone who had been on it for donkeys years and it worked well. After doing a bit of research I found the product had only been around since 2009.