Annuity income valuations

Stubod

I have some old work based pensions that together give a total CETV of about £320k. I am in the process of deciding whether or not to take the CETV or leave "as is". The pension estimates I have been given suggest an annual pension of about £14k at 65,but once I start to take them there are no further rises, (ie no index linking...just £14k per year ongoing).

Just for interest I used the Aviva online annuity quote system to see what I could get if I transferred them into an annuity with basic CPI index linking.

Assuming no index linking it gave about the same annual pension as my original forecast (ie £14k). However if I opted for CPI tracking this reduced the annual pension to £7k (starting, then rising with inflation). Just seems a lot less than I would have expected assuming CPI targets of 2.5 %/yr...or am I missing something?

Thrugelmir

Stubod wrote: »

Just seems a lot less than I would have expected assuming CPI targets of 2.5 %/yr...or am I missing something?

Assuming that CPI will be....... The insurer is guaranting to match. Guarantees need to be paid for.

Linton

When I put yor numbers into the AVIVA calculator I got an inflation linked annuity as £7900. Also it says RPI rather than CPI. If you look at https://www.hl.co.uk/retirement/annuities/best-buy-rates both figures are significantly higher.


I guess the index linked rates are much lower because:
1) There are major risks from higher than average inflation which are not matched by the gains from lower than average inflation - compound interest. Similarly from costs and gains from actual life expectancies differing from predicted average.

2) The only way a pension company can guarantee unlimited inflation matching is through the use of government backed index linked bonds. The rates of return on these are very low.

westv

All goes to show that inflation linked annuities are currently very expensive.

Albermarle

As expensive as similar benefits from a DB fund , which is why they offer what seem to be very high CETV's to reduce the liabilities in the scheme.

Stubod

Hi, and thanks for the feedback. I expected a drop for some form of index linking, but thought it would be more likely around the £9k mark.

The difference int the numbers I quoted maybe because I think I put in some for of "spouse" benefit. I now have the choice of either taking the current CETV and investing it or just waiting and taking the pension.

At the mo I am thinking of taking the CETV but I will see if the valuation changes much when I next ask for my "free" quote which is due the end of the year...