pension annuity help

jumbles_2

my husband is looking at retiring mar 07 ( age 60) we have an amount of approx £100k through various policies, and advisor is talking about annuities ( my husband wants it so that should either die the other is covered) any ideas of best place for this money. Also will have rent from a building we own do this won't be our only money

EdInvestor

my husband wants it so that should either die the other is covered

A joint life 100% pension is expensive ( especially if it's index linked). You might be better with income drawdown, where your fund is left invested and you take an income.This way hopefully it will grow and then if you want an annuity later, you can buy one when you get older and rates are better.

You can check annuity rates here:

https://www.fsa.gov.uk/tables

Are you familiar with investment or willing to learn? If so and you can do without an advisor, big savings can be made by reducing charges for drawdown, which helps the fund to grow.

dunstonh

income drawdown is a high risk transaction. Annuity purchase is a low risk transaction.

There are pros and cons of both options.

The FSA tables on annuity rates are a guide only. They are not reliable as rates change daily and the FSA tables do not. They also do not consider some of the options available which can alter the amount paid.

jamesd

Please say more about who the advisor is. Is it someone from one of those pension companies or a person who has "independent financial adviser" in his job description?

An annuity is what the pension companies will generally want to sell and it's the option that provides the greatest amount of certainty, but probably not the highest pension income. If you want nothing to do with investments, not even having someone manage them for you at a 1% annual charge, this is the very safe option that guarantees the result, at significant cost in potential lost income. If you do buy one or more annuities, do be sure that you use the "open market option" to get the best available rate and mention any health issues, particularly yours, that will affect life expectancy - smoking, diabetes, obesity, anything. These things can substantially increase the annuity value.

Another option is to pay an IFA to manage the money for you, which can cost as little as 1% or so of the fund value a year from an IFA who follows the NMA (New Model Adviser) charging method. In this case the IFA would manage the investments for you and probably achieve a higher income even after the fees for managing the money. This would be an "income drawdown" approach. Income drawdown like this has more year to year variability but allows the taking of a higher income and you can readily smooth out variations by taking some cash out initially and using that to provide a year or two of income. Taking out can be literally out into a savings account using the tax-free cash option or into totally safe investments like government bonds. This allows some growth from the stock market so it can outperform an annuity, which are generally financed behind the scenes with government bonds for the whole amount.

There are other methods as well but those two seem most likely to be interesting. Either will do the job but income drawdown seems particularly interesting when there's a desire to provide the highest future income for a single surviving partner.

EdInvestor

this is the very safe option that guarantees the result, at significant cost in potential lost income.

Not to mention actual lost capital.

Suggest you read up on the options."Phased retirement" ( combination of annuity and drawdown) is another idea. UNder the drawdown rules you can take 20% more income than an annuity.This can be risky, but need not be if your fund is properly invested.

These websites have useful explanations and annuity rate information:

https://www.annuity-bureau.co.uk
https://www.williamburrows.co.uk

It's worth spending as much time as you need understanding the issues on this, so don't rush and don't be pushed into anything you don't really want.

dunstonh

and dont be pushed into anything above your risk profile because it appears to be better. There are reasons drawdown is considered high risk and ignore them at your peril.

EdInvestor

Also will have rent from a building we own do this won't be our only money

OP is also a commercial property investor, in principle why would you think drawdown was unsuitable with a 100k fund at this age?

dunstonh

OP is also a commercial property investor, in principle why would you think drawdown was unsuitable with a 100k fund at this age?

I havent said whether they are suitable or unsuitable. There isnt even the slightest hint which could lead us to say one option or the other is best.

I am just offering a balance to your push for drawdown and that annuity is one option and it may very well be the best option. Drawdown may be a better option. However, we cant push one option over the other without knowing they are suited to it.

We dont know if the building is commercial or residential or how much income it generates or what capital requirements it will demand in the future. We dont know the risk profile or inclination of the individual. £100k also isnt a great deal and if there isnt a lot of alternative income, then the risks increase.

http://www.fsa.gov.uk/pages/Doing/small_firms/advisers/FAQ/withdrawal.shtml
http://www.moneymadeclear.fsa.gov.uk/pdfs/annuities.pdf
http://www.moneymadeclear.fsa.gov.uk/pdfs/income_withdrawal.pdf

EdInvestor

Since the OP's husband's priority is making sure his wife is left in the same position don't you think it odd the advisor doesn't seem to have mentioned drawdown though?

Given that if husband did die young, wife would get return of pension fund minus 35% tax, plus a higher income to start with ( if wanted), whereas an annuity would pay a much lower income and the capital would be lost?

After all the OP has come on here asking for info about other alternatives.I am not "pushing" for the use of drawdown, but IMHO it certainly should be considered in this case.

There are too many paternalistic assumptions made about people's ability to cope with risk by industry people, including the regulator, IMHO.

Most investoirs are not children. If you explain the risks and how to take steps to reduce them, most people grasp the idea quite quickly.There are some who prefer the certainty of annuities, but it should be pointed out that the only reason so many of them are sold in the UK is because until very recently they were compulsory.

In the rest of the world, annuities are avoided by all but a small minority for obvious reasons.

jenko

Another option here could be to use the MetLife Secure Retirement Option. It guarantees you will get back at the very least what you have paid in via income or lump sum and also locks in any growth every 3 years.

Good for risk adverse people who still want to be invested.

clear_blu

EdInvestor wrote:

There are too many paternalistic assumptions made about people's ability to cope with risk by industry people, including the regulator, IMHO.

This certainly isn't the general view when talking about Endowment mis-selling, Pension mis-selling, opting out of SERPS or mis-selling of lump sum investment.
Thats why we have so much in-effective and restrictive legislation around Financial products.