Flat Rate v Escalating Rate for Annuity?

MrChips

Theoretically the 3% and 0% increases you have been offered should have the same present value to the average person, so which you choose should be based on your own preferences, circumstances and risk aversion.

However your reasoning on life expectancy is "flawed". Your 75 figure will be average life expectancy at birth for a male (I think this is a bit higher now anyway - maybe late seventies). However you have already made it this far so of more relevance to you is life expectancy above 65 or so - which is far in excess of 10 years - more like 20 or so (and rising!). The 75 figure will be weighted down by people who are born unhealthy and for whatever reason are unlucky enough to die young which clearly doesn't include you. Life expectancy is a difficult thing to project because by definition you can't measure it until it is out of date. But you can bet that the insurance companies will have used their data on millions of policyholders to project it as accurately as it is possible to do.

ManAtHome

I don't think the reasoning is flawed - you have to live past 88 before you're "in profit" with a 3% linked (total amount received), and over 90 if you've reinvested the difference.

The 77 is when the 3% linked monthly/annual payment catches up with the flat rate.

Channelman

ManAtHome wrote: »

I don't think the reasoning is flawed - you have to live past 88 before you're "in profit" with a 3% linked (total amount received), and over 90 if you've reinvested the difference.

The 77 is when the 3% linked monthly/annual payment catches up with the flat rate.

Thanks for that MAH....at last somebody has popped the figures into an Excel Speadsheet
and seen the difference to which I was refering.
Another point is that having the money NOW is actually worth more than it will be later.


On a similar subject........
Today I received a letter from the DWP asking me if I would take part in a survey about ,
"How people make decisions about buying an annuity".
Apparently they will visit me at home AND pay me £30 for the less than one hour it's going to take.:j

ManAtHome

When I did the numbers a few years ago, looked worth a go taking a pension at 60 instead of 65 (again on level annuity). For me (being a "mucky smoker"), the numbers are very much in favour of a level annuity - just my "luck" to survive to 120.

But if you can cop for 35 surveys a week for the next 20 years...

[Deleted User]

From what you're saying I'd take the flat rate. I assume this isn't your only pension pot so you'll be able to survive even in the worst-case scenario of mega-inflation for a few years.

If you're worried about living a long time (ho ho) then just invest some of the income.

PS Seriously, the best advice would be to go see an IFA. Some of them are pretty good.

Retired_I.F.A.

dunstonh wrote: »

Apart from when they are good value and best advice based on your age or the type of increase you are using.

RPI linking often assumes a level increase p.a. for illustration purposes but in reality, you break even much earlier than the 20 odd years that level increases would take.

Theres an I.F.A.they ought to take out at dawn and shoot for that answer.:rotfl:

The illustration merely depends on what you ask for, I've never seen one labelled as R.P.I. linked that assumes a non compounding escalation rate.

The break even point is the life expectancy of the assured as per the mortality table used.

Channeleman..
Simply put what you gain with a level in the eary years is the equivelent of what you lose in the latter when the compounded rate exceeds the level. Easily visually seen if you bung it into a speadsheet and display it as a graph though you'd need to know the life expectancy the tables assume for you to define the graphs time axis. (appprox age 81-82 for a current 65 year old )

There are very few instances where an excalating pension outshines a level one and they usually depend on other factors many outside of the comparison equation but inside your own circumstances, You need to address questions such as...

by taking a level annuity will that income push you into a higher tax bracket than the one you'd be in having taken the escalating one.?

and...

Will you get a better quote on a like for like basis from transfering the funds to another provider? (Widows were keen on annuities but rarely the absolute best in my experience.)

and...

(Heres where my memory fails having been out of the industry a few years now so get proper advice from a current I.F.A.) There was some SERPS element I think that assumed unisex annuity rates so check out if the Widows illustration includes such as that will mathmatically lean you towards taking the escalation. If thats all changed now or I am getting mixed up with something else then chances are your best option is having taken the tax free lump sum opt for the level pension with or without a gaurenteed term and a spouses proportion, both being dependent on your wants/needs.

Finally, enjoy retirement while your young enough and active enough to.
As I used to say to my clients considering escalation.... "Who the hell wants to wait till they are 82 in a bath chair in an oap's home before they can say "I'm glad I chose escalation."

dunstonh

Theres an I.F.A.they ought to take out at dawn and shoot for that answer.:rotfl:

The illustration merely depends on what you ask for, I've never seen one labelled as R.P.I. linked that assumes a non compounding escalation rate.

Thank goodness you have retired. I see no mention of non compounding escalation rate.

My post says "RPI linking often assumes a level increase ". That is correct. The year two onwards examples use an example rate that remains the same each year. It obviously compounds but the rate remains level on example but in reality will be different as RPI changes.

Retired_I.F.A.

Fair enough I see now what you meant but..

My post says "RPI linking often assumes a level increase ". That is correct.

LOL. not in the English language it's not.

RPI linked annuity illustrations assume an escalation calculated as a fixed percentage and compounded yearly.

Now thats correct and about a million miles from a "level increase."

Hey if you confused me what the hell are you doing to your clients?

And glad I am retired too, it's silly little worded bits like that that get you shafted by the ombudsman.

jamesd

Retired IFA, there is talk of ending the unisex annuity rate for protected rights money but it hasn't happened yet. The change between 2006/7 and 2007/8 rebate levels illustrated in this Scottish Widows article is also pretty significant with the substantial decrease for those over 52 as of April 2007 and modest increase for those younger than that.

Level annuity with investing of the difference (or half of the difference) between level and escalating annuity would probably do better than escalating in income, inflation protection and inheritance size. Does require more work from the retiree though. Maybe use those funds to buy a second annuity at 75 or 85 and hope that annuity rates don't fall in the meantime!

Retired_I.F.A.

Thanks for the links James. well thanks on behalf of Channelman realy as it's more relevant to him. I'd opt for the level personally as to put it in even shorter words than that i used to say so often regarding the bathchair..
a bird in the hand is worth two in the bush.

Unisex rates apart the purchase price/value of each is the same. Providors merely make money themselves on such from admin charges and any mortality table loading they apply so investing any part of the difference will (only on average of course) provide you with more if you invest it in a higher yielding medium instead of the long dated gilts annuities are based on and then your upping the investment risk factor.

There again having said all that about annuities we are assuming an annuity is the right thing for Channelman. Drawdown is a very attrative alternative regardless of the fund size but so few offer it for protected rights or did 5 yrs ago when I last worked in the industry.

Dunstonh.. Looking back on my words now I realise you may think I was having a nasty dig at you, It was not my intention, just my way, the actual words used nowadays with compliance being so to the fore you have to tread so bloody carefully it's unbelievable.

Remind me if you want later and i'll tell you how a typed "w" instead of a "c" cost one IFA a few thousand pounds!