Joint Life Annuities

Albermarle

It's a stab in the dark but is the inflation linking exactly the same for the single and joint life annuity.
( Both RPI for example and not one RPI and one CPI )

Malthusian

Privilege435 wrote: »

I have a pot in the region of £730k of which just over £600k has a GAR of 11.11%. So, taking all the GAR amount as a single life with 5 years guaranteed payout my annual pension would be around £67k and I'd have approx £130k to take as tax free cash.

Why £130k and not just over £150k?

Doing some simple calcs I would have thought the likely amount the company might have to pay my wife would be difference in our ages (2 years) + difference in our life expectancy (2. 5 years) X amount of Wife's pension (say £30k) = £135k . Yet to fund that £135k payout that statistically wouldn't be made until nearly 20 years down the line. They are taking £130k (my potential tax free cash) and also reducing my pension by £4k a year, every year, for probably 20 years so a total of £210k to fund maybe £135k!!!!!!! This does not seem a good deal to me so I doubt I'll be taking up their kind offer.

Annuities are insurance against outliving your average life expectancy. There is a roughly 1 in 3 chance of her outliving her average life expectancy for 5 years, for example, which would change those figures significantly.

That said, insurance is by its nature never that good as an investment. And the general principle is that you shouldn't insure against risks you can self-insure for. (So house insurance is valuable as few people have the resources to buy themselves a new home if their first burns down, but mobile phone insurance generally isn't.) In this case, that implies you need insurance up until the point you can be confident of having salted away enough of the guaranteed annuity that she will be able to live off that lump sum for the rest of her life.

In principle it makes sense but we don't have the numbers. (We don't know how much you need to live on, or what she would.)

Privilege435

Is it a Scottish Widows pension? I only ask as I did one the other day that 11.11% with SW and its an unusual figure.

dunstonh... It is indeed Scottish Widows. I've generally been happy with them but do feel the Joint Life option is very expensive.

Albemarle... They are both level payment, no inflation option.

Why £130k and not just over £150k?

Malthusian... I could take £150k tfc, indeed I could take up to around £180k, but have limited it to the £130k as I want to fully utilise the GAR element and also I have no immediate 'need' for extra cash.

I think I can successfully fund my wife if I'm not around any more as she does already have a£150k pension pot in her own name plus, as well as the property we live in, we have a property we rent out and also a property abroad that we'll sell within the next 10 years or so. We don't have particularly high fixed outgoings and could easily live on much less than my pension will be.. Therefore I don't HAVE to take the joint annuity. We should be able to build up a big enough pot and cover the risk of my early demise with some extra insurance.

bostonerimus

I think your definition of "APPALIlNG" and mine are very different. I'd say your annuity is "AMAZING", frankly SW will probably be losing their shirt on your annuity . I thought my work's index linked pension at a 7% initial payout was good, but 11.1% is ridiculously good.

Privilege435

I think your definition of "APPALIlNG" and mine are very different. I'd say your annuity is "AMAZING", frankly SW will probably be losing their shirt on your annuity . I thought my work's index linked pension at a 7% initial payout was good, but 11.1% is ridiculously good.

Absolutely agree about my 11.11% being amazing (although incompetent might be the appropriate descriptor for the people who promised this rate back in 1985) I'm just very disappointed that they seem to be trying to recover from the earlier mistake by offering a, comparatively, poor Joint Life annuity.

Of course 11.11% didn't seem that special when I took out the policy as I think I was paying 13% for my mortgage around then. Fortunately I did spot my good fortune quite a long time ago and put as much extra into the fund as I could manage.

Malthusian

bostonerimus wrote: »

I think your definition of "APPALIlNG" and mine are very different. I'd say your annuity is "AMAZING", frankly SW will probably be losing their shirt on your annuity .

The guaranteed rate part of the annuity is amazing, the part that is on the wife's life is arguably appalling. (I wouldn't use that word myself - it's insurance, not an investment - but best-buy annuity rates are so bad that pensions legislation was turned entirely on its head in 2014 as a direct result of how bad they are. And the SW rate won't be best-buy.)

Alexland

Privilege435 wrote: »

I'm just very disappointed that they seem to be trying to recover from the earlier mistake by offering a, comparatively, poor Joint Life annuity.

The probability of at least one of two people surviving a long time is greater than the probability of a single person surviving a long time so they have priced the risk accordingly. I would go with the offer that meets your needs even if they haven't offered you as much value for money as you had hoped. It sounds like you are still going to have a very comfortable retirement. Next question is how to spend it?

Alex

Privilege435

Thanks all.

A follow-up question re Decreasing Term Insurance... I'm thinking this may be appropriate since as my savings increase over time my need for insurance will decrease. Does the payout from this type of insurance decrease over time in a linear fashion or is there a curve of some sort?

Malthusian

Privilege435 wrote: »

Thanks all.

A follow-up question re Decreasing Term Insurance... I'm thinking this may be appropriate since as my savings increase over time my need for insurance will decrease. Does the payout from this type of insurance decrease over time in a linear fashion or is there a curve of some sort?

A curve, because decreasing term insurance is designed to roughly match a capital repayment mortgage. The balance of a mortgage falls more slowly at the beginning of the term and rapidly at the end. At the beginning most of the monthly payment goes on interest, while at the end there is much less interest to pay as the balance is much lower.

For a mortgage balance to decrease in a linear fashion you would have to make much larger payments at the beginning of the term, which wouldn't work for most people.

In theory DTA might work because on average, investment growth on the annuity money you have already salted away will cause the pot to rise more rapidly as time goes on. So the shortfall will fall slowly at the beginning (because all that's going in is your monthly contributions) and more rapidly at the end (because now there is investment growth on the pot plus your monthly contributions). However, unlike with a mortgage, the rate at which the shortfall will reduce is unpredictable as investment growth is unknown.

You need to look at the worst case scenario, i.e. whether your wife would be in difficulties if you died during the equivalent of March 2009 and your investment pot had fallen by say 40%, which wouldn't be compensated for by the insurance policy. And whether it's worth the lower premiums. An insurer should be able to give you a table showing you exactly what the policy would pay out in each year.

Privilege435

Good points, as always. I shall investigate further. Thanks Malthusian.