Advice re poor returns on Annuities

candy8234

Hello,
Hope someone can give us some advice.
Here is the background: We are a couple I am 59 my husband is 60.
Children are grown up and independant, mortgage paid off, we are both working full time, my husband in the building trade, me in the public sector. I have a reasonable pension forecast, my husband has been paying into a Prudential Personal Pension since he was in his twenties, we have been increasing the payment steadily and currently pay £700 per month into it.
Having read yesterday in the Daily Mail that for a £100,000 pension pot annuities are now providing between £5,000 to £6,000 per year for a 65 yr old man, we wonder if we should stop paying all this money into the pension and save it elsewhere. We could probably comfortably save between £1500 to £2000 per month for the next couple of years, providing we stay healthy. Given the nature of his work my husband may wish to retire before he is 65 yrs old. We realise there is a tax advantage in saving into a pension scheme, but every year the forecast from Prudential seems to be going down, even though we increase the payments. We did get advice from a Financial Advisor a few years ago, basically he told us that everything we were doing was spot on - and he probably got a nice little earner from the Prudential for telling us what we already suspected. We also read that some old personal pensions have guaranteed returns, how to do we find out if this is one of those?
On the figures above you'd have to live at least 20 years to get back the £100,000 - how can that be right?

dunstonh

my husband has been paying into a Prudential Personal Pension since he was in his twenties

That is unlikely. Personal pensions were introduced in 1988. So, if he was paying since his 20s, he cant have personal pension. He probably has a section 226 retirement annuity contract. This is important as S226s tend to have guaranteed annuity rates. Not all but most do.

That said, you say he is currently paying £700pm into it. So, I suspect he has a combination of plans as you havent been able to top up S226s since 1988.

we wonder if we should stop paying all this money into the pension and save it elsewhere.

How would that help you?

We realise there is a tax advantage in saving into a pension scheme, but every year the forecast from Prudential seems to be going down

The change in the assumptions used to provide projections does not mean the pension is doing any worse/better. it just means the assumptions have changed.

We did get advice from a Financial Advisor a few years ago, basically he told us that everything we were doing was spot on - and he probably got a nice little earner from the Prudential for telling us what we already suspected.

It is unlikely he got a penny telling you what you have is fine.

On the figures above you'd have to live at least 20 years to get back the £100,000 - how can that be right?

You are not looking at the figures correctly. You need to remember the tax relief in, tax free growth, 25% tax free cash back and the income payable using the terms you want. These may not be the terms used in the pension projections which nowadays tend to use the lowest assumptions going.

Hope someone can give us some advice.

have a word with a local IFA https://www.unbiased.co.uk to find your nearest.

candy8234

OK, thanks. So firstly we need to find out the official name of this plan, and ask the Pru if there is a guaranteed annuity.
I think we should also ask them how much the total pot is worth at the moment, as to be honest we have no idea, but guess it should be a reasonable sum.

I'm not sure about your comment about a combination of plans. Until June 2011, every year we were offered the chance to increase the amount and obviously we have done over the years. It was only in June 2011 when we were told we couldn't increase it anymore, we had to leave it at £600 and pay £100 separately, we were told it wouldn't make any difference. So we now pay 2 direct debits every month. I don't recall being told anything about combinations of plans, until maybe 2011.

I understand what you mean about us not looking at the figures correctly, I guess what you are saying is that to get a pot of £100,000 it is unlikely you would actually have paid in that amount.
Maybe, this is the wrong way to look at it, but surely if you are only drawing say £5000 (which is a pittance against what we are able to earn at the moment) per year from a £100,000 pot then you die after 2 years, all those years of being thrifty will have mostly been in vain. That is why in a simplistic way we were thinking by saving say £20,000 in two years, although it wouldnt grow by much, at least whatever happens you have the money, and it can be left as an inheritance.
The reason why we are not keen on asking another Financial Advisor is that the one we used definitely did get commission from the Prudential, because we asked to pay him an hourly rate for his time, but he advised against it as he would receive commission from the Pru. So it definitely cost us money (which I don't begrudge him because he spent some time looking at our finances) to find out we didn't really need to do anything.
Forgive me if we seem naive and un-informed, but this is just the start of us investigating how the system works and what is best for us. It hasn't really been until fairly recently, when we suddenly realise retirement is looming on the horizon, and we keep reading all these horror stories about pensions not being worth what they were, that we have started to worry about what we will actually end up living on.

Linton

The purpose of an annuity is to protect yourself from dying too late having exhausted your money. Just like any insurance its appalling value if you dont happen to call upon it but very good value if you do.

Average life expectancy for someone aged 65 at current mortality rate is around 20 years and is expected to increase significantly over time. Half those aged 65 now can be expected to live longer. I would have thought a fixed rate annuity would be in the upper end of the £5-6K band, but you can see its in the right sort of ball park.

Note - the figure is for a fixed rate - ie no inflation increases.

dunstonh

I'm not sure about your comment about a combination of plans. Until June 2011, every year we were offered the chance to increase the amount and obviously we have done over the years. It was only in June 2011 when we were told we couldn't increase it anymore, we had to leave it at £600 and pay £100 separately, we were told it wouldn't make any difference. So we now pay 2 direct debits every month. I don't recall being told anything about combinations of plans, until maybe 2011.

Pru closed for business in around 2003 for their own salesforce. A number of their plans ceased to be able to be topped up. They still offer a contract via IFAs although I'm not personally keen. Pre 1988 contracts ceased to be able to be incremented in 1988. So, he cannot have had just one plan for the last 40 odd years.

I understand what you mean about us not looking at the figures correctly, I guess what you are saying is that to get a pot of £100,000 it is unlikely you would actually have paid in that amount.

That is the first thing to note. Remember if you put £100k into pension then that is the same as putting £80k into savings (if basic rate taxpayer or 60k if higher rate). So, the pot is higher. It gets tax free growth. And you can take back 25% of the value on commencement tax free. The rest is used to provide income. As much as annuity rates are at all time lows at the moment, so are interest rates on savings.

The reason why we are not keen on asking another Financial Advisor is that the one we used definitely did get commission from the Prudential, because we asked to pay him an hourly rate for his time, but he advised against it as he would receive commission from the Pru. So it definitely cost us money (which I don't begrudge him because he spent some time looking at our finances) to find out we didn't really need to do anything.

Pru dont have in house sales reps any more. I wasnt telling you to see a sales rep but an IFA.

we keep reading all these horror stories about pensions not being worth what they were

scaremongering by the media. When you read the articles that go with those headlines you find out the person was paying £30pm for 30 years and thought they were going to get £1000pm income retirement for 30 years. It is not the pension that is at fault. It is the lack of understanding by the individual. Any option is only as good as what you pay into it. Whether it is pension, S&S ISA or whatever is then just tweaking a bit further. What you pay is fundamentally the most important thing.

Johnny_Tightlips

candy8234 wrote: »

Maybe, this is the wrong way to look at it, but surely if you are only drawing say £5000 (which is a pittance against what we are able to earn at the moment) per year from a £100,000 pot then you die after 2 years, all those years of being thrifty will have mostly been in vain.

What you are saying is technically correct, but you need to be aware an annuity will allow you to build in certain guarantees that can offset that risk.

You can buy a "guaranteed period" which means that your income will be paid to you or your estate for a set period of time, even if you die, i.e. if you die in the 2nd year of taking your annuity but you built in a 10 year guarantee, the income payments will continue in full for a further 8 years, paid to your estate.

You can also provide a widows benefit, which means that a fixed percentage of your income will be paid to your surviving spouse after your death. Normally, this is set at 1/3rd, 1/2 or 2/3rds, but technically you can set it anywhere from 1% to 100%.

The only thing to be aware of is that buying these options will decrease the income from your annuity from outset. In my experience, a 5 or 10 year guaranteed period reduces your income by only a fraction, but a widows benefit will take a larger chunk.

candy8234

Thanks for your help. We have now found out from the Pru it is called a Personal Retirement plan. We asked for notification of how much the pension pot is at the moment. We have now received a letter and have found that provided my husband continues paying the same premiums until the specified retirement date some of the benefits are guaranteed -namely the basic annuity and annual bonuses and others that are not - final bonuses and underlying interest rates.
We have found that currently the pot is worth around £123,000 and in the wording of the letter, it says the following

Basic amount of Annuity £9595
Reversionary Bonus to date £4085

Our outstanding is that as long as he paya till the retirement date and doesn't take a lump sum, he will receive at least £9595 guaranteed, but we are unclear what the reference to £4085 means. Is it a forecasted additional figure per year or over the whole term? We understand this figure is not guaranteed and we believe it to be an illustration.

The letter seems full of contradictions, because it states that there are guarantees as above then later on it says the plan does not contain any guaranteed annuity rates.

It also says a Personal Retirement Plan is annuity based pension as opposed to one that provides a fund with which income in retirement is purchased. I thought an annuity was a fund that provided income when purchased with the proceeds from a pension fund. I don't understand the difference.

The letter does say that this plan has features that other pensions do not have, specifically a guaranteed minimum income.
We are quite optimistic that all this sounds like we have a good product here, but still find some of it quite confusing!

xylophone

Bonuses http://www.prudential.co.uk/prudential-plc/media/glossary/?t=print

"Bonuses refer to the non-guaranteed benefit added to participating life insurance policies and are the way in which policyholders receive their share of the profits of the policies. There are normally two types of bonus:

Regular bonus – expected to be added every year during the term of the policy. It is not guaranteed that a regular bonus will be added each year, but once it is added, it cannot be reversed, also known as annual or reversionary bonus; and

Final bonus – an additional bonus expected to be paid when policyholders take money from the policies. If investment return has been low over the lifetime of the policy, a final bonus may not be paid. Final bonuses may vary and are not guaranteed."

http://www.pruadviser.co.uk/new_pdf_folder/BDMM10060.PDF

The above might help.
If not, first read the policy document/ booklets that came when your husband started the pension and any that have come since.

If the answers to your questions are not there, write down a list of questions which detail exactly what you want to know and set these out in a letter to the Pru.

All being well, all should then be clear and if it isn't, keep asking until it is.

jelloid

My husband and I have been paying into PPPs and an endowment for years. What really annoys me is our pension pots included the commission to be paid to the advisor when the time came to retire. My husband got in just in time and our advisor has just received over £400 in commission for advising him to take his pension (something we were obviously going to do anyway!), but our endowment policy and my pension haven't matured yet so the advisor will not get paid by the provider - but the amount of money in our pots will not increase. If we want advice when the time comes we will now have to pay for it - but we have already paid for it. The providers (in this instance Scottish Widows) should be forced to leave the money in the customers pot.

dunstonh

What really annoys me is our pension pots included the commission to be paid to the advisor when the time came to retire.

Doesn't happen any more. Now, they wont pay the original adviser but they will keep it for themselves.

our advisor has just received over £400 in commission for advising him to take his pension (something we were obviously going to do anyway!

Unlikely as that has been banned for over 2 months.

If we want advice when the time comes we will now have to pay for it - but we have already paid for it.

No you havent.

kidmugsy

candy8234 wrote: »

Basic amount of Annuity £9595
Reversionary Bonus to date £4085

Dear God, the wording of these sorts of things drives me up the wall. Clearly it should say

"Basic amount of Annuity £9595 a year" or "Basic amount of Annuity £9595 per annum" or "Basic amount of annual Annuity £9595" or something else that makes ruddy sense.

How about the reversionary bonus? Is it an annual sum? Or is it a lump added to the pot before the annuity is calculated? How the devil are people meant to tell from what's said? Or are they meant not to know? Aaaaargh!!!