What happens at the end/finish of a Pension?

bob_dob

Hi, im incredibly naive when it comes when it comes to Pensions, basically i know nothing!!

So, bearing that in mind, please can someone help explain something:

Today i was speaking to someone and i was explaining how one possible option for my parents was to sell £100,000 equity of their home and buy an annuity so they could get a guaranteed income of a couple of hundred a month! He asked me what an annuity was and i gave him the best description i could. He then said "There's no point in that as when they cash in your pension you get a couple of hundred a month anyway" (i guess by 'they' he means the pension provider).

My question is isn't an annuity what the Pension provider purchases anyway? And that this is why it is always advisable not to automatically go with the annuity that your pension provider offers?

gadgetmind

An annuity is simply a way of turning a lump sum of money into a (usually) monthly income for the rest of your life. Some annuities pay the same every month, some will pay more each year, some will cover your spouse if you die, but that's the basic idea. There are also normal pension annuities and Purchased Life Annuities, with the latter being those bought outside of a pension wrapper and which have some tax advantages.

The reason you shop around for an annuity is to get a better rate. If someone says the annuity rate is 5% (and this number will depend on type of annuity as above, age, gender, and much more) then it means that for every £100,000 you spend on the equity, you get £5000 pa income (pre tax). Different companies will offer different rates. Higher is better. :-)

Loughton_Monkey

bob_dob wrote: »

Today i was speaking to someone and i was explaining how one possible option for my parents was to sell £100,000 equity of their home and buy an annuity so they could get a guaranteed income of a couple of hundred a month! He asked me what an annuity was and i gave him the best description i could. He then said "There's no point in that as when they cash in your pension you get a couple of hundred a month anyway" (i guess by 'they' he means the pension provider).

???

An extremely bizarre converation!

A house is a house. A pension scheme is a pension scheme. They are two different things. Do your parents have any form of pension scheme?

If they have any pensions schemes (private, or from previous employment) then at a certain age, these pensions can be 'taken' either as an annuity, or as a 25% tax free lump sum and a reduced annuity. [There are minor exceptions and complications, that are not important right now].

Now as a totally seperate matter, they may not have pension schemes, or they may only have small pension schemes, but [I am assuming] they own their own house. So are you asking how they can obtain some sort of 'income' from the value of the house? If so, then this is called "Equity Release". A very difficult subject in itself, and 'annuity' is not normally associated directly with equity release. When you do equity release, it is usually in the form of getting a 'cash value' secured on the house. This cash value can then 'buy' an annuity, or maybe simply 'drawn down' on a regular basis.

Can I suggest you go to a web site like "Google" first, and play with a few expressions to do some basic research? After that, if you have specific questions on pensions, then fine. Questions on Equity Release, then that's also fine. Reasing a few posts here at random or by searching might help.

But I am afraid the statement "There's no point in that as when they cash in your pension you get a couple of hundred a month anyway" has no meaning whatsoever. Firstly, you don't normally 'cash in' your pension. Secondly, to assume - as a matter of course - that any pension will produce 'a couple of hundred a month' is naive in the extreme.

bob_dob

Hi, im incredibly naive when it comes when it comes to Pensions, basically i know nothing!!

=

???

An extremely bizarre converation!

I did warn you!! Thanks, though, for the sarcy 'Can I suggest you go to a web site like "Google" first, and play with a few expressions to do some basic research? ' comment.

Obviously i realise/realised i have much, much to learn- that wasn't my point. My point was a simple request for a minute bit of info, thankfully, that i have now received!

But I am afraid the statement "There's no point in that as when they cash in your pension you get a couple of hundred a month anyway" has no meaning whatsoever. Firstly, you don't normally 'cash in' your pension. Secondly, to assume - as a matter of course - that any pension will produce 'a couple of hundred a month' is naive in the extreme.

As i suspected...but thankfully this has been verified.

bob_dob

Do your parents have any form of pension scheme?

No, unfortunately, they do not.
I am aware of the many, many pifalls associated with Equite release, i was not and will not recommend this to my parents without full financial advice, the question i was asking myself was just one of those ones that you ask yourself (attempting to explore all options,, when really- it actually seems that their options are rather limited as they will not consider 'downsizing'.

Bigmoney2

Are your parents eligable for any benefits e.g pension credit, council tax benefit?
Selling part of their equity in their home would give them savings which may cancel out their eligability for help.
I'm assuming they receive state old age pension.

bob_dob

Hi BigMoney2, thank you very much for your help.

Yes, my parents do receive the benefits you mentioned. I wasn't really aware that selling equity in their home could reduce/cancel their benefits but it does ring distant bells....isn't there a threshold of something like £10,000?

Please understand that my mentioning equity release to my friend doesn't necessarily mean that i was suggesting it was the way forward, it's just that i didn't (and don't) see any other way for a married couple, who are in the situation that my parents are, to receive an income into their later years.

The fact that i mentioned annuities and have a rough idea of what they are means that the term 'bizarre conversation' doesn't really apply, i wouldn't have thought.

My friend's uneducated comment regarding pensions could well be construed as 'bizzare', i'll grant you that!

Finally, can you see any way in which a couple such as my parents could utilise the equity they have to at least help them a bit as they get older?

Thank you again- Bob

System

If a couple have no assets other than an unmortgaged house, no savings and no pension, then their options are limited to doing something with the house:
1) Equity release means in effect selling a proportion of the house to an income provider, but they include in the deal letting them go on living in it for the rest of their lives.

2) Moving to a smaller or cheaper house and using the capital released to generate an income, by investment or annuity purchase

3) Sub-dividing the house or taking in a lodger

4) Moving in with you and letting the entire house to provide an income

and probably a few other variations.

But you can't get something out of nothing. If they want income, they have to surrender something.