Annunity: preliminary take on

Blue_Parrot

I apologise in advance if the subject of Annuities is unwelcome through repetition here. I have tried searching for previous threads on this topic but that yielded little.

I have a meeting with an IFA in a couple of weeks, and would like to do some background research before then, which includes trying to discuss this with people who know what they are talking about, i.e., here.

This is my take on Annuities so far:

Despite the evidence that one has taken a responsible view of one's finances over one's entire working life by paying into a pension voluntarily, the fact that an Annunity has to be entered into by Law seems to me near-Orwellian. The Government forces people to do this because they "don't want you to run out of money", as if every one is a complete financial nitwit after they've retired.

Secondly, the deal seems to be that if your pension pot were, say £100,000, you have to hand this over to an insurance company who will then a punt on how long you are likely to live. If they guess that it is likely to be 10 years, they will give your own money back at £10,000 p.a. How nice of them.

Thirdly, it seems to me that the exact reverse to life insurance applies. If the Annuity company thinks you are a heavy smoker/drinker and not likely (in their opinion) to live for 10 years, they will deign to allow you more than £10,000 p.a. of your own money which they then irrevocably hold. Your PostCode has something to do with this, to my astonishment.

Fourthly, I am appalled to learn through web research that should the Annuitee die within their predicted term, the rest of his very hard-earned pension pot, which is his money anyway, is not released to the widow or any other dependants. They just take it.

Who thought that one up, by the way? Why would people enter into these contracts which seem to me to be a huge gamble on life expectancy notwithstanding accidental death, unless they were legally obliged so to do?

The more I look at this, the more of a win-win it seems to be for the insurance/annuity companies. How can they lose, when people are forced to "buy" these contracts, which I have also discovered cannot be altered once signed. If the contractee dies before their computed death-date, they take all the remaining money!

If I have got any of that wrong, I'll be glad to hear it. Further apologies for trying to start a thread on this if it bores people stiff. We all have to start self-teaching somewhere.

Many thanks for any helpful replies.

Proxy

Your apologies are unfounded, you ask perfectly reasonable questions.

You are not bound to buy a lifetime annuity. You can take income drawdown, a fixed term annuity, and a range of investment linked annuities. Despite popular knowledge, options are there.

But yes, lifetime annuities are a hedge against life expectancy. And it's an offer you won't find elsewhere. With life expectancies averaging at over 20 years past retirement, it's good deal. The use of health conditions (and postcode) is an attempt to be more accurate in their predictions.

As for death benefits, you can choose to provide for a spouse or for a guaranteed period of up to ten years. You'd be surprised about the number of people who actually choose not to.

But it's really not a win-win for insurance companies. If you choose no death benefits and die, then the insurance company does win. But if you live to 100, the insurance company loses big time.

Blue_Parrot

This is a typical example of conflicting information on the internet:

From here: http://www.pensionsorter.co.uk/Annuities.cfm

"You don't need to get an annuity immediately you retire. You can hold off till you're 75 - when you have to buy one by law."

From here: http://boards.fool.co.uk/annuity-question-12262843.aspx?sort=whole#12262843

"No-one 'has' to buy an annuity at any time"

From here: http://www.guardian.co.uk/money/2010/dec/09/compulsory-annuities-scrapped

"Investors with big pension funds will no longer have to buy an annuity at the age of 75, following the implementation of proposals published today."

From here: http://www.thisismoney.co.uk/money/pensions/article-1694062/Compulsory-annuities-at-75-to-be-scrapped.html

"Pensioners will no longer have to purchase an annuity at 75 under Britain's new Con-Lib coalition government, it emerged today.

Both parties have agreed that the current law that forces all Britons with a pension pot to purchase an income-paying annuity by the time they reach 75 should be scrapped."

Should be? Was it?

"As yet there has been no indication as to when the new legislation on annuities would take effect."

This is a Mine Field.

Blue_Parrot

Proxy wrote: »

Your apologies are unfounded, you ask perfectly reasonable questions.

You are not bound to buy a lifetime annuity. You can take income drawdown, a fixed term annuity, and a range of investment linked annuities. Despite popular knowledge, options are there.

But yes, lifetime annuities are a hedge against life expectancy. And it's an offer you won't find elsewhere. With life expectancies averaging at over 20 years past retirement, it's good deal. The use of health conditions (and postcode) is an attempt to be more accurate in their predictions.

As for death benefits, you can choose to provide for a spouse or for a guaranteed period of up to ten years. You'd be surprised about the number of people who actually choose not to.

But it's really not a win-win for insurance companies. If you choose no death benefits and die, then the insurance company does win. But if you live to 100, the insurance company loses big time.

Thanks Proxy, you posted while I was researching links.

"You are not bound to buy a lifetime annuity."

So is one bound to buy any annuity at all?

The point is, since I am clearly financially responsible and have not retired yet, why does the Government assume that I will lose my financial marbles upon retirement? (That is assuming that the imperative to hand over all one's pension savings to an insurance company is still extant - which I have not determined.)

It stands to reason that I am not the only person approaching retirement who is really offended by this assumption. i.e., he/she is a "little old man/woman, we'll make sure they are not a drain on the State".

hugheskevi

So is one bound to buy any annuity at all?

No. You can:

• Take an annuity
• Use capped drawdown
• Use flexible drawdown (requires secured pension income of £20,000+ p/a)
• Not commence pension
• Take trivial commutation (requires total pension under £18,000, or occupational pension worth less than £2,000)

The point is, since I am clearly financially responsible and have not retired yet, why does the Government assume that I will lose my financial marbles upon retirement?

The reasoning is what do most people want to fund their retirement? When they think about it, most want a guaranteed income that will last as long as they live, however long that might be. Which sounds a lot like an annuity.

If it wasn't [nearly] compulsory (there are alternatives, but the most end up taking annuities) then rates would be awful, as only those that expect to live to very old ages would purchase annuities (adverse selection) causing rates to be even more pitiful than they are currently. People would have to guess when they will die, and inevitably have to be quite cautious in their assumptions, which on average would increase the amount needed to fund their retirement income relative to an annuity.

For the ones who don't want annuity-like income, there is income drawdown.

It stands to reason that I am not the only person approaching retirement who is really offended by this assumption. i.e., he/she is a "little old man/woman, we'll make sure they are not a drain on the State".

Once you have secured an income of £20,000+ you can take your pension savings as a lump sum.

Annuities, not being able to take a pension until 55, 25% lump sums and such like are all part of the pensions deal. There are other vehicles available (SS ISAs for example) if the restrictions make the vehicle unattractive.

BLB53

So is one bound to buy any annuity at all?

No, the pension rules changed in April 2011. Before then you could put back buying an annuity until 75 yrs at the latest but now that has changed. Lots more clear info on the Investments Sense website.

BLB

dunstonh

the fact that an Annunity has to be entered into by Law seems to me near-Orwellian.

As said above, there is not requirement to buy an annuity.

The internet is a very bad place to get advice. You will see articles written under old rules. Articles written by people that dont know the subject or articles written by or influenced by those with an agenda (the newspapers often get "experts" in who are often working for a company that may offer one of the options so they may steer that option as being best).

pre 2006, annuity compulsion did exist and was slightly watered down in 2006. Then last year (temporary rules introduced then but firm rules came in this April) the ConLibs removed the final blocker and allowed you to keep unsecured income right through to death as well as another option as mentioned by hugheskevi.

atush

The point is, since I am clearly financially responsible and have not retired yet, why does the Government assume that I will lose my financial marbles upon retirement?

Why do you assume the law is for you? Instead of the many who aren't financially responsibe? We get people here very day wanting to 'cash in' their pensions in their 20s, 30s, 40s and even 50s. Who get every upset when we point out a- not possible and B- not the thing to do even if you could. They would fritter it away within days if not weeks and have to rely on benefits oin old age.

The govt makes legislation on this point to cover the idiots/irresponsible along with the intelligent/responsible.

The rest has been pointed out to you- you don't have to buy an annuity when you retire if you don't want to and even if you do you can buy one that will provide for a spouse if you want to. There are many choices in annuity purchace incl also index linking and impaired life (if you have a serious illness that means you are likely to die younger).

Annuities are actually a very good thing should you be in very good health with parents who lived into their 90's as you will stand to get back a lot more than you paid in (subsidized by those who died younger).

You need to do more and better research ;-)

JoeCrystal

atush wrote: »

We get people here every day wanting to 'cash in' their pensions in their 20s, 30s, 40s and even 50s. Who get every upset when we point out a- not possible and B- not the thing to do even if you could. They would fritter it away within days if not weeks and have to rely on benefits oin old age.

Hear Hear! Though have anyone notice drastic reduction in number of threads posted about cashing in pension since the Sticky went up?

sandsy

The whole idea behind insurance - whether purchasing an annuity or life insurance or even general insurance such as motor - works on the concept of pooling of risks. I can pay a fortune in car and home insurance each year and never claim. It's all about knowing it's there if you need it. It's exactly the same for annuities - it's about providing peace of mind because because it provides a specified income for life, no matter how long you may live for. I pay £50 eveery month for my 25 year term insurance - I'm seriously hoping it won't be necessary for my family to claim on it!

Insurers have long used a range of factors to assess risks for general insurance (motor, household etc) including things like postcode. It's only relatively recently that an increased range of rating factors has been used for annuities. People have accepted that it helps define the risk more clearly for general insurance so why not for annuities too? Or is it a case of it's fine when it's in your favour but not when it's not?

As for the rest, as previous posters have indicated, regulation is always changing. Make sure you read the most up-to-date information you can find from reliable sources to inform yourself before you meet with your IFA.

RichandJ

JoeCrystal wrote: »

Hear Hear! Though have anyone notice drastic reduction in number of threads posted about cashing in pension since the Sticky went up?

It does seem to have worked.

So far.