Decision time for annuity

[Deleted User]

Hi everyone, Need to bounce off some ideas with the pension experts. I have now received the pension pack from my provider, and during the next few weeks I have to decide on which way to go. OK - these are the options:

1 GAR annuity rate of 9.25% of fund value but pension only paid annually in arrears. However, I checked with them and they tell me that in the event of my death, my estate will receive pro-rata accrued monthly payments. Would this be correct?

2 Reduced GAR of 8.658% but with the option of having the pension paid monthly.

There are the usual other conditional variables such as 25% lump sum, 5 year guarantees and spouse/dependent's pension, and of course the transfer of the fund to other companies, but I'm discounting these as viable options. However, not sure about the lump sum - the way I see it is that if I don't take the lump sum, I'd be earning an extra 9.25% on that sum, whereas if I take it as a lump sum (I know it's tax free) I'd be earning at most 4% in a bank and still pay tax on the interest.

My feelings are to take the pension as monthly repayments using the reduced GAR, without the lump sum. Not much difference between the 2 GAR's. Can someone please tell me if this would be a wise decision or is there something I may be overlooking? Not sure if going to an IFA would be of any benefit, since there is very little else that can be done. Any comments please would be much appreciated

DavidLaGuardia

Good rate (I'm assuming you are not that old and do not qualify for impaired health rates) Whether anything else is better for you is down to circumstances and the risk you want take (such as investments that may do better over a long time)

With arrears, if you die before the next annual payment in arreatrs you may have what is called apportionment in this case meaning if you have live, say six months from the start or after any payment, they will pay your estate half of the amount that would have been due

You should also understand that you are NOT earning 9.25%, part of this is a return of your capital!
It's also taxable in full so effectively the return and the captital are being taxed. However, it still may be a good idea compared to cash accounts producing less than 4% assuming you don't die too soon!

dunstonh

1 GAR annuity rate of 9.25% of fund value but pension only paid annually in arrears. However, I checked with them and they tell me that in the event of my death, my estate will receive pro-rata accrued monthly payments. Would this be correct?

Depends on the terms but normally as default, its not pro-rata. its normally a line in the sand. I would want it in writing if they are saying pro-rata as it is possible but if its in writing, you are covered.

Not sure if going to an IFA would be of any benefit, since there is very little else that can be done.

Other than consumer protection and getting the admin completed for you and verification of date of birth (i.e. certified copy or birth certificate and marriage certificate), probably not. However, if the pension paperwork shows a commission is being paid, then it is a no cost option for you as the commission will go to the original selling agent or the pension company if you dont use an IFA. If you do use one, the IFA can become the servicing agent and be paid it instead.

[Deleted User]

dunstonh wrote: »

Depends on the terms but normally as default, its not pro-rata. its normally a line in the sand. I would want it in writing if they are saying pro-rata as it is possible but if its in writing, you are covered.

This is why I raised the question. If I go with this option, I will have it confirmed in writing. I'm not going to rely on the word of some front line servicing agent.

Other than consumer protection and getting the admin completed for you and verification of date of birth (i.e. certified copy or birth certificate and marriage certificate), probably not. However, if the pension paperwork shows a commission is being paid, then it is a no cost option for you as the commission will go to the original selling agent or the pension company if you dont use an IFA. If you do use one, the IFA can become the servicing agent and be paid it instead.

Thanks Dunstonh for pointing this out. It would be nice to establish a working relationship with an IFA as I'm sure I will need some professional financial advise in the future, but in this instance, it sounds like you agree with my strategy.

kidmugsy

The two GAR options: it looks as if each £1000 can generate either (i) £92.50 per annum, or (ii) £86.58 per annum. The latter arrives, on average, half a year earlier. By my calculation that means that you can look upon option (i) as being a way of investing the funds from option (ii) at an annual rate of about 14%. How very tempting.

[Deleted User]

kidmugsy wrote: »

The two GAR options: it looks as if each £1000 can generate either (i) £92.50 per annum, or (ii) £86.58 per annum. The latter arrives, on average, half a year earlier. By my calculation that means that you can look upon option (i) as being a way of investing the funds from option (ii) at an annual rate of about 14%. How very tempting.

Thanks kidmugsy for your reply - not sure if what you're saying is correct. Yes the rates do indeed equate to 92.50 and 86.58 per 1K of fund value. However, with the 92.50 GAR, this will be paid yearly in arrears, so for the inception year, nothing is paid until 12 months have elapsed. With the 86.58, this will be paid as a monthly rate of the annual amount. So not sure if I'm missing something here - would the 92.50 rate paid in arrears work out better than the 86.58 paid monthly. That's the bit I can't get my head round.

atush

You figure out the interest on that money for the median amt of time (ie 6 months) as only the first payment would have gotten interest for the full 12.

so I make that 5.92*12/6= 11.84% But what do I know lol.

fairleads

[quote=[Deleted User];discussion/3750415]Hi everyone, Need to bounce off some ideas with the pension experts. I have now received the pension pack from my provider, and during the next few weeks I have to decide on which way to go. OK - these are the options:

1 GAR annuity rate of 9.25% of fund value but pension only paid annually in arrears. However, I checked with them and they tell me that in the event of my death, my estate will receive pro-rata accrued monthly payments. Would this be correct?

2 Reduced GAR of 8.658% but with the option of having the pension paid monthly.

There are the usual other conditional variables such as 25% lump sum, 5 year guarantees and spouse/dependent's pension, and of course the transfer of the fund to other companies, but I'm discounting these as viable options. However, not sure about the lump sum - the way I see it is that if I don't take the lump sum, I'd be earning an extra 9.25% on that sum, whereas if I take it as a lump sum (I know it's tax free) I'd be earning at most 4% in a bank and still pay tax on the interest.

My feelings are to take the pension as monthly repayments using the reduced GAR, without the lump sum. Not much difference between the 2 GAR's. Can someone please tell me if this would be a wise decision or is there something I may be overlooking? Not sure if going to an IFA would be of any benefit, since there is very little else that can be done. Any comments please would be much appreciated[/QUOTE]

Assuming you have no dependants, taking the full amount and monthly payments would appear to be the better option. However, if you have enough cash to support yourself for a year then it might pay you to take the single annual arrear payment.

DavidLaGuardia

atush wrote: »

You figure out the interest on that money for the median amt of time (ie 6 months) as only the first payment would have gotten interest for the full 12.

so I make that 5.92*12/6= 11.84% But what do I know lol.

I've calculated this precsiely to 1 d.p. assuming that the monthly payments are at the end of each month.

This means the first payment gets 11 months of interest, the second 10 and so on. Using a median amount is flawed as compounding isn't linear.

The Annual equivalent return is 15.3% p.a.

IF the payments would be paid monthly in advance then you have to compatre it with an extra month of investment for each payment to get the same return, iu which case the difference in return is 12.7% - still good.

fairleads

[quote=[Deleted User];discussion/3750415]Hi everyone, Need to bounce off some ideas with the pension experts. I have now received the pension pack from my provider, and during the next few weeks I have to decide on which way to go. OK - these are the options:

1 GAR annuity rate of 9.25% of fund value but pension only paid annually in arrears. However, I checked with them and they tell me that in the event of my death, my estate will receive pro-rata accrued monthly payments. Would this be correct?

2 Reduced GAR of 8.658% but with the option of having the pension paid monthly.

There are the usual other conditional variables such as 25% lump sum, 5 year guarantees and spouse/dependent's pension, and of course the transfer of the fund to other companies, but I'm discounting these as viable options. However, not sure about the lump sum - the way I see it is that if I don't take the lump sum, I'd be earning an extra 9.25% on that sum, whereas if I take it as a lump sum (I know it's tax free) I'd be earning at most 4% in a bank and still pay tax on the interest.

My feelings are to take the pension as monthly repayments using the reduced GAR, without the lump sum. Not much difference between the 2 GAR's. Can someone please tell me if this would be a wise decision or is there something I may be overlooking? Not sure if going to an IFA would be of any benefit, since there is very little else that can be done. Any comments please would be much appreciated[/QUOTE]

After taking note of some of the comments and checking the figures it does appear that the annuity providers are being stingy, to say the least, with the reduced monthly option. And its obvious that most pensioners would opt for the monthly option and retire sooner rather than take the annual option and work for another year. In which case the provider has the leverage, so to speak, to offer a much lower monthly payment. However, and bearing in mind that if we don't ask the question we won't get answer, if i were you i'd ask them to up the ante a bit with the monthly annuity option. You've nothing to lose. It might even pay you to first talk it through with an IFA, providing the interview is a freeby that is. Or better still, may be some of the IFA regulars here could chip in with some specific advice.

jamesd

Given the numbers the annual option looks best. You can probably live on 0% credit cards or other borrowing or savings for long enough to make the year of delay acceptable.