should we act on this new ruling?

Froglet

http://www.avtrinity.com/wp-content/uploads/2012/05/Gender-Equalisation-JL-April-2012.pdf

My husband has just over 120k ,split between three pension companies,the biggest being a stakeholder.He will be 62 in January and wants to pack in work by then,maybe do a part time job if he can,so we would need a pension to live on but would not want to pay tax.We intend taking the maximum lump sum and investing it for a monthly income.

With this new ruling would it be sensible to act now and convert to an annuity? We have an advisor and he is coming to see us next month but just wondered what people's thoughts are on the matter.Especially as annuities are low at the moment but could of course get worse.He is not paying into a scheme at present,so all his pensions are paid up.

How long on average does it take to sort out an annuity,and can you combine the different pensions to make one annuity.Obviously our advisor will get quotes for the best one and hubby does also have diabetes so that might help a bit but there is still so much i don't understand about pensions though i am generally quite astute about most money matters.

I also have a smaller amount in pensions but am not as near to retirement as my husband so not worried for now.Anyway it seems that it willl be men who come off worst.

dunstonh

With this new ruling would it be sensible to act now and convert to an annuity? We have an advisor and he is coming to see us next month but just wondered what people's thoughts are on the matter.Especially as annuities are low at the moment but could of course get worse.He is not paying into a scheme at present,so all his pensions are paid up.

No-one yet really knows the differences. With women living longer than men it is clear there will be a change. However, it is likely to be somewhere between the two. That is what most predict will happen (mainly as it is most obvious). However, the difference is likely to be no more than the typical movement you get in annuity rates over a month.

How long on average does it take to sort out an annuity

10 days to 3 months typically. It depends on scheme, health conditions etc.

Obviously our advisor will get quotes for the best one

If it is an IFA then yes. If it is an FA then that would not be correct. Make sure it is an IFA.

hubby does also have diabetes so that might help a bit

It should allow for enhanced terms.

The abolition of male/female rates is not likely to be enough to want to make you change your plans. Whilst annuity rates are low, the investments you typically use in the lead up to retirement (gilts) have been performing very well. Largely linked to the same causes that have hit annuity rates. Gains of 10% over 12 months have made up for falling annuity rates. So, whilst low annuity rates tend to get the headlines, the media ignores the fact that gilts have seen gains that are totally out of their normal range for the last 5 years.

roysterer

dunstonh wrote: »

Gains of 10% over 12 months have made up for falling annuity rates. So, whilst low annuity rates tend to get the headlines, the media ignores the fact that gilts have seen gains that are totally out of their normal range for the last 5 years.

Gains of 10% over the last 12 months, What about the -16% over the last 5 years!!!!!!!!!!!!!!!
The FTSE / and World markets in general at this present time is no more than a Casino that over re-acts on a daily basis.
With the euro crisis at the moment we could be -30% from the current level this time next year. Who knows, an IFA is no more informed than Joe public.

RED OR BLACK, BLUE CHIPS OR SMALLER COS, LATIN AMERICA OR ASIA.

The only people who can guarantee to make money in any climate are Fanancial Advisers and Market Makers.
I guess the Dunstonh fan club (IFAS United we stand) would not agree.

dunstonh

Gains of 10% over the last 12 months, What about the -16% over the last 5 years!!!!!!!!!!!!!!!

What -16% over the last 5 years? Gilt funds are up around 40-50% typically over the last 5 years. Most people looking to retire in that period would be expected to have altered their investments to be heavier in gilts than equities. However, even if they stayed in the most common pension fund going, the balanced managed fund, then these are up around 15% over the last 5 years.

Do you make up figures to make your exclamation marks look good?

The FTSE / and World markets in general at this present time is no more than a Casino that over re-acts on a daily basis.

What has that got to do with it?

Who knows, an IFA is no more informed than Joe public.

If you are representing Joe Public then it is clear you are wrong.

The only people who can guarantee to make money in any climate are Fanancial Advisers and Market Makers.
I guess the Dunstonh fan club (IFAS United we stand) would not agree.

I am quite happy for people to take what I say with a pinch of salt. They can choose to listen, comment or disagree. Then they can look at your posts and see what rubbish you are talking and make their own mind up on you too.

Do you know what a Gilt is? Not sure you do on what you have typed.

Froglet

Thanks dunstonh for your informative reply.I shalll relay to hubby what you have said and we can be having a think whilst we are waiting to see our IFA.

I do find the process of trying to work out which funds are good or not very difficult.The end result each year for the past few don't seem to have risen that much,but perhaps that is because they state that coming up to retirement they are put into less risky funds.

It seems unfair that so many people like us who are about to retire,will have less money for the rest of our lives because of all the problems affecting the world's finances.

jamesd

Froglet wrote: »

With this new ruling would it be sensible to act now and convert to an annuity?

Not really. Fiscal easing and the troubles in Europe have contributed a greater effect to lowering of annuity payouts and he's also very much on the young side to get extra value out of an annuity from a cross-subsidy from those who will die early, that tends not to be a big factor unless buying at an age significantly over 75. Buying annuities when gilts are at record low yields inevitably produces a poor deal for buyers.

Since you clearly are comfortable with investing and plan to invest a quarter of the money he might want to consider using income drawdown as the income source instead of buying an annuity. Initially perhaps only until the effects of fiscal easing and the Eurozone trouble are out of the system, perhaps three to five years minimum.

Froglet wrote: »

My husband has just over 120k ,split between three pension companies,the biggest being a stakeholder.He will be 62 in January and wants to pack in work by then,maybe do a part time job if he can,so we would need a pension to live on but would not want to pay tax.We intend taking the maximum lump sum and investing it for a monthly income.

From the £90,000 he might perhaps try to take £5400 a year (6%) using drawdown. He'll be capped by the GAD limit and forced to use less than that, though. I assume that he'd want higher income initially to try to keep a level income before and after the state pensions start so would look to deliberately reducing his capital to do that for a few years.

Froglet wrote: »

can you combine the different pensions to make one annuity.

Yes, normally.

Froglet wrote: »

hubby does also have diabetes so that might help a bit but there is still so much i don't understand about pensions

Buying an annuity is one time when it's important to be suer that everything that could conceivably reduce life expectancy is declared because of an enhanced annuity that increases the payout level.

Some of the trade offs between annuity and drawdown include:

1. Annuity spends the capital to provide a fixed (but possibly escalating) income for life. No chance of an initial boost to cover the time until state pensions start, no significant investment risk.
2. Drawdown keeps the investment risk but offers more flexibility about varying the income profile over time.
3. With an annuity you can spend some of the money to lower the initial payout to provide payment to a spouse after his death. With drawdown the spouse gets 100% into a pension pot of their own to provide income, without any extra reduction in the initial payout rate.
4. Money in an annuity is gone, not available for inheritance. Money in drawdown is inheritable, with a 55% tax charge for any taken outside a pension, including if a spouse wants it outside a pension instead of inside.

Now is a pretty good time for those who are comfortable investing to use drawdown instead of buying an annuity.

Froglet

Thanks very much for your post James.I have heard of income drawdown but don't understand it to be honest.I thought it applied to people with a lot more money than we have.

We shall discuss it with our IFA but he is fairly new to us,we have only had an initial meeting with him.Very useful to know and understand things beforehand.

jamesd

You've plenty of money for drawdown if you don't use one of the more expensive providers. Not sure if you'd meet an IFA's drawdown thresholds, though, they may use higher limits.

Drawdown is fairly simple in essence, just investing similarly to the way the money has already been invested in the pension, but with investments modified to favour income and lower volatility. If you do a google search here for:

site:forums.moneysavingexpert.com drawdown jamesd

you'll find a fair number of posts covering other aspects of it, like the desirability of keeping a couple of years worth of drawdown income in savings to provide smoothing of income.

dunstonh

With RDR coming in and post RDR requirements being higher, it will be harder for an IFA to justify doing the work required for the remuneration being paid on small cases. Either the remuneration is not enough or the charge required relative to the amount invested becomes too high to make it viable.

My compliance company seems to suggest that anything invested under £70k should not a portfolio of single sector investments as the work that will be required (using post RDR requirements) will not generate enough income to cover the time spent, compliance and liability. Currently, the software providers dont automate much at all. I expect them to develop more on that front and that should allow for lower costs and that may allow that figure to fall. That figure is just one compliance company opinion. Others may have different views.

Still at this time, the FSA consider drawdown to be higher risk than james would consider it to be. Although I personally believe the risk is not as high as the FSA would consider it, it is still a higher risk transaction and there are plenty of people out there who have lost out under drawdown compared to annuity. Risk is about things that can go wrong. Not about the positives that make it attractive.

If something can go wrong then sooner or later it will go wrong. If you think of an area that say has a 1 in 100 year flood risk, you could live there for 50 years and never see a flood. Whereas the person that lives there after you could see two in 10 years. The recent financial events have reminded us that bad things will happen periodically. You may get lucky and avoid them due to timing or you may be unlucky. An economic cycle is closer to 10 years. So you would expect a recession in there somewhere. There have been 8 financial crisis since 1956. Some impact heavily. Others less so or quickly recovered. The financial crisis of the last few years is closer to a 1 in 100 year event and has a lot of similarity to the great depression proving that we don't learn from our mistakes. One generation might but the next who did not experience the troubles will become complacent and believe there is little or no risk.

Anyway, the point is that drawdown has advantages but it has extra risks. Your income in retirement will not be guaranteed and will be subject to a three year review. which could see it go down as well as up (and you will probably experience a drop at some point). If you have the capacity to be able to afford that drop then it is an option worth considering. If the thought of a variable income that could drop scares or you cannot afford such a thing then you should look to eliminate drawdown as a viable option.

jamesd

I'd say the risk depends hugely on how either is done. For a significant amount of money I'd want to do things like using more than one annuity company to reduce single supplier risks, in spite of the good protections provided. I'd also ponder the risks of the annuity companies being heavily invested in gilts, given government default and credit rating risk that might seriously harm the market value of the underlying investments. I haven't really looked into the systemic risks in the annuity sector, though.

In general I expect drawdown to have higher investment risk but lower inflation risk. Various other risks in drawdown that also tend to make its baseline risk level higher than an annuity. Firecalc is an excellent reality check for those who don't know about the risks of uncommon events or just unlucky timing.

The cash buffer I mentioned matters a lot. It's how you avoid having to take income from sale of investments during down times. That can be a huge value destroyer. It's also a buffer against at least some of the legislative risk, though that can never be done away with. Getting the money out of the pension as fast as possible also manages that legislative risk.

Agree with dunstonh's post, though, aside from my view of the risks - I probably think it's higher risk than he thinks I think it is. But then, I have been investing and living through a 1 in 100 year event so I should have a fair context. I haven't lived through the FTSE dropping to 10% of its value, a possible extreme event, though.

jamesd

dunstonh wrote: »

With RDR coming in and post RDR requirements being higher, it will be harder for an IFA to justify doing the work required for the remuneration being paid on small cases. Either the remuneration is not enough or the charge required relative to the amount invested becomes too high to make it viable.

It'll be interesting to see whether some IFA pricing uses a hotel model, priced lower at off peak times and higher at on peak. A potential opportunity to service those with lower values or just wanting lower costs if they are willing to time their work appropriately.