Is an IFA essential for purchasing an annuity?

Meadowman

I'm taking my private pension in August, at the same time as my state pension kicks in. I already draw an NHS pension, so the private one with Zurich is a bit of a bonus. I simply want to take the 25% lump sum of around £22000, a and look on the open market for a single life annuity for the remaining £66000ish. My initial choice was one provided by Hodge, but they wont deal direct with the public, saying we must use an IFA. I would rather not incur the expense of an IFA but if it's the only way, how much would I expect their fees to be? If there are providers of annuities who do deal direct with the public, how do I find them?

bmm78

Meadowman wrote: »

I'm taking my private pension in August, at the same time as my state pension kicks in. I already draw an NHS pension, so the private one with Zurich is a bit of a bonus. I simply want to take the 25% lump sum of around £22000, a and look on the open market for a single life annuity for the remaining £66000ish. My initial choice was one provided by Hodge, but they wont deal direct with the public, saying we must use an IFA. I would rather not incur the expense of an IFA but if it's the only way, how much would I expect their fees to be? If there are providers of annuities who do deal direct with the public, how do I find them?

You don't have to use an IFA, but the commission payable on a policy even if you go direct would often be larger than an adviser fee.

Meadowman

When you say commission charge, does that mean a "setup fee" or just the fee a provider charges for selling you the annuity? Do you know the kind of amount they would charge an individual for that? It might follow that if I use an IFA I get hit for the IFA fee plus the provider's commission. Seems rather loaded against the consumer, really.

dunstonh

I simply want to take the 25% lump sum of around £22000

Which puts your purchase price at £66000.

My initial choice was one provided by Hodge, but they wont deal direct with the public, saying we must use an IFA.

A number of the providers do that. So, not unusual. Although the selection of Hodge is unusual.

I would rather not incur the expense of an IFA but if it's the only way,

Although if you apply direct, you incur expenses in dealing with that provider. its not free. Same if you use a non-advised route.

If there are providers of annuities who do deal direct with the public, how do I find them?

Why would you want to compromise on the rate by bypassing the adviser. Again, going direct does not avoid costs.

Going back to that £66k figure, an adviser is likely to cost around £1000. Commission from direct or non-advised is typically around the 3% mark which is £1980. So, using an adviser is likely to result in a better income that going direct or non-advised.

When you say commission charge, does that mean a "setup fee" or just the fee a provider charges for selling you the annuity?

if you go direct or DIY, the provider can still factor in commission for the sale. That reduces the annuity rate (e.g. £66k pot is reduced by the amount of the fee or the commission).

It might follow that if I use an IFA I get hit for the IFA fee plus the provider's commission.

Advisers do not get paid a commission. Commission is only paid if non-advised/going direct. In this case, you should be able to get an adviser to do it cheaper than the commission if you DIY/go direct.

Seems rather loaded against the consumer, really.

How?

Meadowman

That was really helpful, thank you. I was competely unaware of the pitfalls of the unadvised route, so hats off to you. I guess going onto a site like unbiased.co.uk will help me decide.

kidmugsy

Meadowman wrote: »

I'm taking my private pension in August, at the same time as my state pension kicks in. I already draw an NHS pension, so the private one with Zurich is a bit of a bonus. I simply want to take the 25% lump sum of around £22000, a and look on the open market for a single life annuity for the remaining £66000ish.

There's a high-value annuity available, and it's index-linked. Just defer drawing your state pension. For every year of deferral they will pay you 10.4% Extra Pension. Fantastico.
https://www.gov.uk/deferring-state-pension/what-you-may-get

Make up for the missing income by drawing down from your Zurich pension for that period. There would be no need to take investment risk: just keep the moolah in a pension cash fund until you draw it out.

For illustration, if your state pension would be, say, £6k p.a., defer for two-and-a-half years, using £15k at Zurich to cover it. That leaves you £51k to spend on your planned annuity.

Some people will doubt the wisdom of buying the annuity, but it's your shout.

If you'd like a bit more index-linked annuity that's decent value, but not as ridiculously good as the deferral, consider buying some more Additional Pension using 3ANICs, available in the autumn.
https://www.gov.uk/government/publications/additional-state-pension-top-up

Linton

Meadowman wrote: »

When you say commission charge, does that mean a "setup fee" or just the fee a provider charges for selling you the annuity? Do you know the kind of amount they would charge an individual for that? It might follow that if I use an IFA I get hit for the IFA fee plus the provider's commission. Seems rather loaded against the consumer, really.

Its no different to buying anything else. Manufacturers may well not be set up to deal with end user purchases. If you can buy an item direct from the manufacturer you will probably be charged full list price whereas you may well get a better deal and advice on the best buy from a retailer.

The differences between annuity rates from different providers are often much greater than charges.

jamesd

As kidmugsy explained, you're reaching state pension age before the flat rate state pension comes in so you if you take income from the 75% part of the pension to replace the state pension you can get a much higher income than normally offered by annuities.

Say you bought a typical single life level (not inflation linked) annuity. At the moment at 65 that would pay around 5.5% of the purchase price, so around £3,600 a year from the £66,000 75%. I'll assume that you have a state pension entitlement of £8,000. This value is important, it determines how many years you have to defer to spend all of the pension pot buying the income, the higher it is, the more income you end up for for your money when deferring.

Here's how the years work out doing that:

Year 1: start deferring the state pension, just by not claiming it. You need to take £11,600 from the pension pot to match the state pension and annuity income you're not yet getting. Pension pot value at the end of the year is down to £66,000 - £11,600 = £54,000. You've bought yourself 10.4% of the £8,000 state pension in inflation-linked mostly inheritable income for that, £832 worth so far.

Year 2: still don't claim the state pension. Take £11,600 out of the pension pot again, it's now down to £42,400. State pension increase you've bought is now £1,664. The 10.4% doesn't get compounded, so it's just 10.4% to add each year. But it does get increased with inflation, I'll adjust for that at the end.

Year 3: same thing, pension pot value now £30,800. Sate pension increase purchased is up to £2,496.

Year 4: same, pension pot value at the end of year now £19,200. State pension increase purchased is £3,328.

Year 5: same, pension pot value at end of year £7,600. State pension increase now at £4,160.

Year 6: not enough in the pot to defer for the whole year, can defer for about 7600 / 11600 = 0.655 of a year, so about that times the £864 a year increase form deferring, roughly £566 a year. That takes you to £4,726 a year of state pension increase.

At this point before allowing for inflation you've got yourself £4,726 of inflation-linked and mostly inheritable income instead of the £3,600 with no inflation increases and no inheritance you'd have if you bought the annuity.

Now you claim your state pension. All of the inflation linked increases to the state pension are added then the increase percentage is applied (I used money amounts but it's really done on percentages). Say the average inflation is around 2% for five years and ignore the sixth partial year the inflation-related increase would be 10.4% (coincidentally the same as a year of deferring, but that's just coincidence, not any sort of rule). Add that extra 10.4% for the inflation link while deferred and you're up to £5,217 a year.

So at this point:

1. Annuity: you'd still have just the level £3,600 a year.
2. State pension deferral: you have £5,217 a year and it'll keep on increasing with inflation.

Instead of 5.5% of the pot with no inflation linking you'd end up with 7.9% inflation-linked (5217 / 66000 * 100 = 7.9%).

That's a deal that's too good to refuse.

However, there are enhanced annuities out there that just might conceivably pay more than that. Also, if your state pension is lower it will take longer to fully spend the pot, so you might just stop when you're matching what the annuity will pay. For bigger pension pots than yours or for low state pension levels it can be uneconomic to defer for long enough to match the annuity. People in that situation can get the best value by deferring for that amount of time and doing something else with the rest of the pot.

I've ignored investment growth for these calculations and annual inflation increase in the state pension income replaced to keep things simple.

Linton

James - slight problem with your calculation. After the first year the decision to defer for a second year should be based on the annuity you would be able to buy at 66, not on the annuity you didnt buy at 65. So deferring becomes less advantageous as you get older.

jamesd

Linton, yes that's another of the approximations I used, like skipping inflation increases of the state pension each year. The overall effect isn't significant in this case because the rate for a standard annuity will never beat deferring.

Just to illustrate that since you mentioned it, today the annuity rate at 70 is 6.352% according to the HL table. So for the pot remaining at the end of year five the choice is get 6.352% of £7,600, which is £482. Even before adding the five years of inflation-increase to the deferral level that's less than the £566 of inflation-linked and inheritable income from continuing deferring with that remaining pot.

So it's something to bear in mind for the deferral decision-making and it'll be relevant for larger pots or lower state pension levels, wherever the number of years of deferral gets large enough for annuity rates to become competitive. That won't ever happen for normal pension pots, state pension levels and possible enhanced annuity rates but it does need to be borne in mind.

Linton

jamesd wrote: »

Linton, yes that's another of the approximations I used, like skipping inflation increases of the state pension each year. The overall effect isn't significant in this case because the rate for a standard annuity will never beat deferring.

Just to illustrate that since you mentioned it, today the annuity rate at 70 is 6.352% according to the HL table. So for the pot remaining at the end of year five the choice is get 6.352% of £7,600, which is £482. Even before adding the five years of inflation-increase to the deferral level that's less than the £566 of inflation-linked and inheritable income from continuing deferring with that remaining pot.

So it's something to bear in mind for the deferral decision-making and it'll be relevant for larger pots or lower state pension levels, wherever the number of years of deferral gets large enough for annuity rates to become competitive. That won't ever happen for normal pension pots, state pension levels and possible enhanced annuity rates but it does need to be borne in mind.

Whilst the rate is 10% the case is pretty solid for quite a few years. However at 5.8% it's more of an issue.