Am i missing something ?

jem16

elantan wrote: »

in what way can they not afford it? would they loose some of their pension pot taking this out?

An annuity is worked out on a percentage figure of the total pot. Taking a level income, with no spouse provision, no increase in line with inflation and no guarantee for a fixed time gives you the highest percentage figure.

So for example you would get around 6% for the "no-frills" option but only around 3.5% with the "all-inclusive" option. So with a pot of £100k, it would be £6k pa or £3.5k pa.

is this the 25% tax free amount you are talking about?

No. If you had £100k and took £25k as your tax-free lump sum then your annuity would be based on £75k.

Does everything you do with your pot cost?

Basically the more options you choose, the lower your annual income.

dunstonh

i may be being dumb here... but why would anyone want to do that?

Breakeven point mainly and other income that is index linked. People expect to spend less as they get older. Their state pension and possibly some other income may be index linked. So, they dont need it all index linked. I did one the other day that with a 3% calculated RPI it would have taken 29 years to breakeven on amount paid out.

elantan

I think I'm ( very) slowly getting me head around this, sorry to ask so many ( dumb) questions

If then say I was to have £100k ( purely using figures for ease here ) and I wanted an all singing dancing annuity and got one at 3.5% and didn't take the 25% tax free amount ( purely cause I don't have a calculator handy to work out exact figures) I would get £3.5 k per year ( approx ... I fully understand these arnt exact figures just examples) I would need to live 27 plus years to get all my 100k out?

But say I lived 10 years there would be £65k left and that would go to hubby?

Do I have that right ?


If I had the non singing dancing one at 6% and didn't take the 25% tax free I would get £6k a year and need to live 15 plus years to get my £100k back and if I died say year 10 I would have had £60k in pension payments and loose the other £40k as I chose not to get one that left the money to my family?

Is that the way the annuities work ? ( I'm thinking annuities for dummies here ... Me being the dummy lol)

Ok if I have that right ... What are the other options I could do with a pension pot ( dummy style)

Thanks again everyone for your help I understand alot more now and do appreciate the help

sandsy

The drop in your projected income is due to three things:
1) the reduced growth rate from 7% to 5% which impacts more the further you are from retirement
2) the massive drop in illustrative annuity rates between 2007 and 2012 which is used to convert your pension pot into an income
3) the change in the life expectancy assumed in the annuity rate which not only assumes you will live for way longer than could have previously but that you will also only be able to buy an annuity on gender equal terms.

elantan

dunstonh wrote: »

Breakeven point mainly and other income that is index linked. People expect to spend less as they get older. Their state pension and possibly some other income may be index linked. So, they dont need it all index linked. I did one the other day that with a 3% calculated RPI it would have taken 29 years to breakeven on amount paid out.

Again I'm probably being stupid here again... But if someone knows there break even point is 29 years, did they expect to live 30 years or did they expect to pass any remainder onto loved ones shoul they die at 15 years or so ?

It's deffinatley given me a lot of food for thought today and something I have not thought of up till now, my ignorance could've cost me and my family a lot ... The help in this forum has been worth it's weight in gold, I shudder to think how many people choose not to learn of these things ...

I think I understand things quite well then a phone call like today comes along and kicks me out of my complacency

elantan

Sorry about the spelling, I'm on the phone and autocorrect likes to make my life hell.. Some letters like to be deleted without me noticing as well

dunstonh

Again I'm probably being stupid here again... But if someone knows there break even point is 29 years, did they expect to live 30 years or did they expect to pass any remainder onto loved ones shoul they die at 15 years or so ?

This person didnt expect to be around in 29 years and nor did the insurance company given the annuity rate that was offered to them. There was a significant bias to level income because of their health. He took a 10 year guarantee which ensured more than his fund value would be paid out in the event of death prior to year 10.

elantan

I'm confused again ... I tell ya dunstonh ( and other I.F.A's) you guys must really work for your money, getting the right deal for your client can't be a walk in the park, you must have to weigh up so many options and discount so many others

So this guy ( with the break even at 29years) was basically betting against the annuity company ? He's thinking if he lives less than 10 years after retirement he's onto a winner ? Other than that he is gonna want to live for 30 years at least ?

It sounds to me ( and I could be totally misunderstanding me) it's like betting on your death against the annuity company to see who comes out top? And who gets the most profit , the guy whose pension it is or the annuity company who pays out ... To use a loosely basic gambling analogy

What then is the process for draw down ?

Which is another thing I have heard of but don't fully understand

dunstonh

If then say I was to have £100k ( purely using figures for ease here ) and I wanted an all singing dancing annuity and got one at 3.5% and didn't take the 25% tax free amount ( purely cause I don't have a calculator handy to work out exact figures) I would get £3.5 k per year ( approx ... I fully understand these arnt exact figures just examples) I would need to live 27 plus years to get all my 100k out?

On a money purchase pension you would almost certainly always take the 25% lump sum (there are good reasons but some exceptions). So, lets say it is £100k after lump sum.

£133,333 with 25% leaves you £100k. So, straight away you have £33,333
£100k at 3.5% (which is a fair rate for RPI) is £3500 a year. It would take 22 years to get the money back assuming 2.5% RPI.

Level basis at 5.5% would have same lump sum of £33,333.
£100k at 5.5% is £5500 a year. It would take 18 years to return the fund the value.

Those rates fitted a 63 year old. So, age 81 on level and 85 on RPI. RPI carries greater liability risk (as there will be periods when it is higher). 4% inflation would breakeven at year 19-20.

With unsecured income, you remain invested and draw an income (just like you would if you had an ISA). You take 25% out, the 75% remains invested. You structure the investments for risk profile and income. When you die, the pot passes to spouse (if you wish) and spouse continues income. If dependent child exists they can get it next. If not, whatever is left can be paid as a lump sum minus a tax charge (that largely equates to taking back the tax relief - the person getting it can always put it back into the pension and get tax relief. It is also outside of the estate for IHT purposes)

Annuities are not great value for money at this time. They are likely to get worse before they get better. They may not get better. Just this week there were media articles saying that insurers are preparing for most people to hit 100 and not a minority. The unsecured pension option is for the people that dont mind investment risk and can afford it. The better death benefit is a key feature for many people choosing that option.

dtsazza

elantan wrote: »

If then say I was to have £100k ( purely using figures for ease here ) and I wanted an all singing dancing annuity and got one at 3.5% and didn't take the 25% tax free amount ( purely cause I don't have a calculator handy to work out exact figures) I would get £3.5 k per year

You'd get £3.5k in the first year, yes. One of the all-singing features of your annuity would be that it rises with inflation, so the amount you got in subsequent years would be higher. (The exact increase would depend on inflation rates, and which features your annuity has.)

I would need to live 27 plus years to get all my 100k out?

But say I lived 10 years there would be £65k left and that would go to hubby?

Do I have that right ?

Probably not. Once you buy an annuity, the £100k in your pot is gone. You've used it to buy something worth £100k: the annuity.

Your husband would not get a lump sum from your pot, then - they'd get whatever the death benefits are that the annuity defined. Usually this would be some percentage of your yearly payment (typically 100% or 50%) for a number of years.

Even if they did get a lump sum, this would be the result of a life-insurance type feature, rather than being your "unused pot" (which doesn't exist).

Is that the way the annuities work ?

Nope - the annuity company gets/owns all of your money immediately, in exchange for the "income stream" you're buying from them.