Are annuities really such a bad deal?

showmethehoney_2

I was just about to buy an annuity but the budget has made me crunch the numbers again and I have come to the conclusion that annuities aren't quite as terrible as everyone says, though I'm in favour of the budget proposals. Am I missing something?

A little background - which you can probably skip; I'm only 56, cannot work but have too much in the way of savings - not a fortune, I promise - to receive any benefits so I've been living for years on just the income from those savings, which as some of it is still in fixed accounts at 6% [happy days] is about £3-4k pa. As you can imagine, there's little left once I've paid the mortgage and the council tax and I reckon I could teach Martin a thing or two about money saving. These higher rate accounts will mature soon and I'll have next to nothing coming in and I'm terrified of eating into my savings. Hence the plan to buy an annuity, even though everyone was saying 'wait', even before the budget. I'm very risk averse, partly because I don't have enough money to take risks with and partly because I do have four separate small 'stocks and shares' type investments made 14 years ago of which only one is showing a profit - though the providers have made a packet. I know I chose badly and am stupid to have left the money there but the FTSE is only where it was 15 years ago - I realise there's a dividend income in addition but even so it's not a great record - so I don't feel confident about anything other than a building society. I know people make fortunes, but others lose them and I don't want sleepless nights.

So.... If I bought an annuity now it would give me about £65 a week. The same amount of money in the building society - and this is just for comparison as I'd have to give a chunk of cash to the taxman if I cashed in the whole pot in one go* - wouldn't give me an income to match unless I took out some capital to top up the interest, so, taking out £65 a week, the money would run out eventually. Over the last 20 years it seems that 4% would have been a decent average return from a savings account. Taking a pessimistic view and imagining savings rates slowly rising to 3% and staying there, the money runs out in my early eighties. A really optimistic view has rates quickly rising to 5% and staying there, in which case the money runs out in my late nineties, which probably won't be seen as a great age in 40 years time. A middle view with rates steadily rising to the average of 4% would see the money gone in my late eighties.

* I just did the sums imagining the taxman had taken his share (20% of 75% minus my personal tax allowance which I'm not using) and the pessimistic view has the money running out in my seventies, which is pretty scarey.

To my mind, that makes the endowment look much less mean than popular opinion would have it, even with rates as low as they are now, and I've read opposing views on whether the ability to cash in pensions will cause them to increase or decrease next year. Also that new, better, products will be invented by then which might be worth waiting for.

Of course, if we have a spell early 90's inflation the annuity plan is scuppered, though another period of 0.5% base rates would make the it look like a great investment, though even with normal rates if I were to live to 100, £65 would barely buy a tin of beans by then, so perhaps there's no point thinking so far ahead.

And there are many other factors to take into account in deciding whether or not to take your pension pot in cash. Simply needing the cash or wanting to leave a legacy, how long you expect to live and so on. But in my unusual circumstances, writing this has almost convinced me to sign up for the annuity next month....

Thank heavens for the single tier pension. I'm going to have to stump up for some extra 'stamps' now you need 35 rather than 30 but I simply can't imagine how I'll get through so much money after living on air for so long. I still think there should have been some phasing in of that increase, even if it wouldn't help me at my age. People with exactly 30 years of NICs and thinking they were set for a full pension in 2016 suddenly find themselves five years short with only two years to make up the difference. How is that fair?

Any thoughts?

Linton

I think you are right. If you need a steady secure life-long income and have no over-riding concern about what happens after you die then nothing will beat an annuity. This is possibly true of the majority of people.

Unfortunately many people seem to have fallen for the media driven "annuities are a rip-off" story which means that under the new freedoms I fear they will make foolish retirement decisions.

kidmugsy

showmethehoney wrote: »

now you need 35 rather than 30 ... should have been some phasing in of that increase, ... People with exactly 30 years of NICs and thinking they were set for a full pension in 2016 suddenly find themselves five years short with only two years to make up the difference. How is that fair?

This point is ill-judged. For many decades the requirement had been 44 years for men, 39 for women. The reduction to 30 for each was a quite unnecessary waste of taxpayers' money; sticking it back up to 35 was a decent decision. Almost everyone now facing the requirement for 35 years had faced a requirement of either 39 or 44 years for almost all their working lives. Me, I'd have stuck it back up to 39 for both.

Linton

Agreed. Also anyone close to retirement will have been paying NI in the expectation that they will be getting £107 inflation adjusted after 30 years. If their NI was 30 years they would get £123 under the new scheme - so they havent lost out.

showmethehoney_2

Linton wrote: »

Agreed. Also anyone close to retirement will have been paying NI in the expectation that they will be getting £107 inflation adjusted after 30 years. If their NI was 30 years they would get £123 under the new scheme - so they havent lost out.

Hmm. I was hoping for more comments on the annuities than the NICs.

My 'expectation' was based on the Green Paper which a few years ago said 30 years NICs would be enough for a full single tier pension and was what people were basing their plans on. People weren't expecting the sudden change in the White Paper, that's why I think it's unfair. I agree it's still not ungenerous though if I don't buy more 'stamps' I'd actually be better off under the old system. And with the complication of having opted out for a while I have no idea how many extra years I will have to, or be able to, buy to get a full pension.

Ros Altmann thought the change "unfair" - that's good enough for me.

Eric_the_half_a_bee

Leaving aside the problems associated with not bothering to shop around, which apply to virtually any product, annuities probably have been unfairly maligned if what is wanted is a guaranteed income.

I do wonder though whether the idea of a guaranteed income is a little out of date, in the context of 40 year average retirement durations?

SallyG

"The removal of the need to buy an annuity simply means pensions will now be treated as what they are: tax-efficient investment vehicles that just happen to have a specific purpose. The money at the end is no more likely to be treated as a windfall than profits from any other investment.
People will be given access to the cash at a point when they will need to be planning how to fund the next phase of their life. Faced with increased longevity and insufficient state pensions, they are hardly likely to take the lot and put it on a horse."
might do - if the horse is called drawdown?


00ps sorry - I forgot to attribute the quote .........
http://www.ftadviser.com/2014/03/21/opinion/jon-cudby/reports-of-annuities-death-are-greatly-exaggerated-66S2mbMMFPhbeDEvsMktRP/article.html

atush

I like the horse called Drawdown and will be putting some money on it.

But then again, I am not risk averse. Having married a brit and moved here whnich was very high risk behaviour. I am very happy to invest in equities and have been doing so for decades. I also hold property, cash and even a tiny bit of gold. We hold bonds and gilts too.

Equities have done the best for me, as has property where I actually built my own and that also paid off.

showmethehoney_2

Sally;

Looking ahead, I really don't think state pensions can be said to "insufficient" for most people. Imagine a couple - it's tougher for singletons, believe me, I know - both with a minimum of £147 in today's terms. They will probably have been auto enrolled into a second pension too, plus anything they've put aside themselves. With the mortgage and kids out of the way that's enough to be reasonably comfortable on. Any more generous and you have to wonder how it is going to be funded.

ScottyLP

There are 2 things which I don't think have helped annuities.

Firstly the introduction of gender neutral rates. And secondly the amount of people who annuities at 55 in order to release the pcls and end up left with poor rates as they've taken their annuity 5/10 years earlier than they would have. Reducing the age of both commutation rules would have helped.

showmethehoney_2

atush wrote: »

I like the horse called Drawdown and will be putting some money on it.

But then again, I am not risk averse. Having married a brit and moved here whnich was very high risk behaviour. I am very happy to invest in equities and have been doing so for decades. I also hold property, cash and even a tiny bit of gold. We hold bonds and gilts too.

Equities have done the best for me, as has property where I actually built my own and that also paid off.

Not meaning to sound bitter and twisted, but it sounds as though you can afford to be less risk averse than I can! I can't gamble with the little I have. I'd have been thousands of pounds better off if I'd stuck my money in the bank rather than pay an "expert" to look after it.