MSE News: New pension freedom means it pays to know when you'll die

kidmugsy

JimmyTheWig wrote: »

I take your point about shareholders.

It's probably my weakest point. In all these things costs are always far bigger than profits. So really the tontiners are gaining mainly at the expense of all the annuity company employees, and the companies' advertisers, lawyers, accountants, and other suppliers. Plus the tax takers, of course.

Banging on about company profits is usually the sign of an economic ignoramus.

Pincher

greenglide wrote: »

You accepted when investing in a pension that you could defer the taxation and in return would probably purchase an annuity or more recently enter drawdown (capped or flexible).

30 years ago, the only real known choice was an annuity.
The tax rebate was used to purchase the annuity.
The expectation was 8% to 10% annuity rate, which went up to 13% around 2000.
I "accepted" on the assumption of a really good deal.

greenglide wrote: »

On what basis are you now whingeing about the pensions having rules that you seem, now, not to like?

After 30 years, I now know how restrictive and one sided the deal is. I loved my Final Salary scheme, still do, but new people don't get to have it. They get the restrictions and inconvenience, but not the security.

greenglide wrote: »

Look on pensions (old age pensions) as a way of funding retirement rather than a financial instrument to use for tax avoidance and relatively short term investing.

You are actually agreeing with me. Invest away, with no tax rebate. Spend it freely, when you feel like it.

chris1

jamesd wrote: »

Depends on the age of the person. Class 3A NICs pay less extra income than deferring at younger ages but become a better deal nearer to age 80+. So defer as first choice, then compare Class 3A NICs to the annuity options. The potential to do better is there, just depends on the specifics.

What are your thoughts on deferring (at SPA) AND paying Class 3A as well (whilst in deferment)?

Pincher

JimmyTheWig wrote: »

So is the money held by annuity companies, surely.

Pincher wrote: »

You still need an independent third party to run it, which is good job creation for all the annuity clerks soon to be unemployed.

JimmyTheWig wrote: »

All of which is the same as an annuity.



Why?
[Unless the flip side of this is that if you live for a shorter length of time you get less than you would have done with an annuity?]

In a casino, you are playing against the house. When you lose, the house wins. That's the annuity.


In your club house, playing poker with your buddies, the money stays in the room. That's the Tontine.

yorkshire_bank_pack

I found an old pension recently which is now woth Pheonix Life they tell me its locked till I am 65 so I cant draw 25%

Anybody explain as they won't ?

jamesd

chris1 wrote: »

What are your thoughts on deferring (at SPA) AND paying Class 3A as well (whilst in deferment)?

Potentially useful if it will take too many years to match the maximum £25 a week gain from class 3A. Not as good a deal as just deferring in most cases where deferring started at state pension age. The cost of each pound is in a table available here. Using that I've worked out the percentage gain at each age to ge ta little table to compare with deferring or annuity purchase percentages:

Age	cost£	%
63 (women only)	934	5.57
64!(women only)	913	5.70
65	890	5.84
66	871	5.97
67	847	6.14
68	827	6.29
69	801	6.49
70	779	6.68
71	761	6.83
72	738	7.05
73	719	7.23
74	694	7.49
75	674	7.72
76	646	8.05
77	625	8.32
78	596	8.72
79	574	9.06
80	544	9.56
81	514	10.12
82	484	10.74
83	454	11.45
84	424	12.26
85	394	13.20
86	366	14.21
87	339	15.34
88	314	16.56
89	291	17.87
90	270	19.26
91	251	20.72
92	232	22.41
93	216	24.07
94	200	26.00
95	185	28.11
96	172	30.23
97	159	32.70
98	148	35.14
99	137	37.96
100	127	40.94

As you can see from that the inflation-linked increase beats an inflation-linked standard annuity at all ages and will often beat an enhanced annuity but it takes quite a lot of deferring before it becomes as good a deal as the 10.4% from deferring.

However, it's not that simple. The money being used for spending while deferring doesn't grow at 10.4% so you have to allow for that extra cost. A rough estimate is that if deferring will take yo to age 75 it's probably a good idea to use Class 3A as well. If only to age 70, forget about Class 3A and just defer. To do this properly you'd want to calculate the effective cost of the increase from deferring by working out the cash flow and the gain/loss you're making on the money you're setting aside to pay for living while deferring.

If you are deferring and buying with Class 3A, the effective gain of the Class 3A purchase is lower because you've got to allow for the lost investment gain on the money spent on Class 3A. Something to include in your cash flow cost calculations.

Even stock market long term average growth of 5% plus inflation is less than the age 63 gain of 5.57% on the money so it's good to buy more state pension with Class 3A, just not as good as deferring for a few years.

Pincher

yorkshire_bank_pack wrote: »

I found an old pension recently which is now woth Pheonix Life they tell me its locked till I am 65 so I cant draw 25%

Anybody explain as they won't ?

They claim the old contracts don't allow it.


You can transfer to a new scheme that is draw down friendly, but typically they want a "set up" fee, not to mention an early termination fee, and possibly a Market Value Adjustment.


Beware of pension liberation scam.


When April comes, millions of complaints like yours will spring up.
Just before the election, so they will come up with a hasty ill-conceived quick fix.


I would say a loan secured on your pension pot.


Tax dodge
________


Since the pension manager is typically a Life Insurance company any way, here is a possible tax dodge. Let us say you have £10,000 with Standard Life, but you can't touch it. Standard Life provides a FREE life insurance, where they pay out the balance in the pension pot if you die. Costs nothing to Standard Life, and they can charge a closing/redemption fee if you do die. You name Barclays as the beneficiary, and borrow £10,000 from Barclays.


On your Death, Standard Life pays out £10,000 to Barclays, claiming a taxable loss, to offset the £10,000 gain from your pension pot.


You have already spent the £10,000 before you die, Hurray!
The Treasury gets nothing. Hurray!

kidmugsy

Pincher wrote: »

In a casino, you are playing against the house. When you lose, the house wins. That's the annuity.

No: for annuities when you die early it's mainly the surviving annuitants who gain; that's the mutual insurance aspect. But, as I said above, you also have to cover all the costs of the company, and the cost of cautious overprovisioning. (If it proves to be overprovisioning: nobody can know in advance). So a tontine might cut costs (depending on its own costs), and be advantaged by being finite rather than an insurance fund that is, in principle, perpetual.

kidmugsy

Pincher wrote: »

You can transfer to a new scheme that is draw down friendly, but typically they want a "set up" fee

Who's "they"? I've transferred several pensions: no set-up fee was involved with any of them.

JimmyTheWig

kidmugsy wrote: »

No: for annuities when you die early it's mainly the surviving annuitants who gain; that's the mutual insurance aspect.

Future annuitants, arguably, but existing surviving annuitants won't have their pay-outs increased part way through their policy.