Huge fluctuations in annuity rates...

Charlton_King

I've noticed, looking back over recent annual statements, that 'projected pension' rates have varied hugely over the last few years owing to differing annuity rates.

Whereas the 'projected final pot' for my pension is now considerably higher than it was a couple of years ago thanks to higher contributions, the actual 'likely pension' this might buy has actually gone down by a fifth.

It seems to me that private pensions savers are on a hiding to nothing - they could put in huge amounts in the final years only to find that their crystal ball has let them down on the actual annuity rate on offer at the time of maturity. They could have been better off sticking it all in an ISA or suchlike.

Have I misunderstood what is happening here? Is there no such thing as 'smoothing' of these rates..?

dunstonh

I've noticed, looking back over recent annual statements, that 'projected pension' rates have varied hugely over the last few years owing to differing annuity rates.

I doubt it is due to annuity rates in the short term. They have been on the slight increase in the last 5 years but not enough to cause any significant changes. If you are looking back longer than that then annuity rates are of course much lower than in the 80s and 90s.

Whereas the 'projected final pot' for my pension is now considerably higher than it was a couple of years ago thanks to higher contributions, the actual 'likely pension' this might buy has actually gone down by a fifth.

Thats nothing to do with annuity rates.

It seems to me that private pensions savers are on a hiding to nothing - they could put in huge amounts in the final years only to find that their crystal ball has let them down on the actual annuity rate on offer at the time of maturity. They could have been better off sticking it all in an ISA or suchlike.

They would be no better off in an ISA. The performance would be identical.

Have I misunderstood what is happening here?

Yes.

Projection rates from providers over the years have come down. Now they are 5%, 7% and 9%. In the past they were much higher. Providers are allowed to use lower projection rates but cannot use higher.

Also, some providers have changed from monetary growth rates (above) to SMPI basis growth rates which factors inflation at 2.5% to give you a real terms projection. Typically they would use 7% as the growth rate and 2.5% as inflation rate although providers can reduce these.

Some providers have decided to use lower growth rates if you have low risk funds and standard growth rates if you have medium risk or higher. Some have moved to lower across the board.

As for income, many providers have gone from using single life, level basis with 5 year guarantee, to joint life (with 50% spouse) and/or increasing basis.

It doesnt mean you have to purchase that particular annuity, its just the one they are illustrating. Many providers and IFAs will be able to obtain projections for you using the annuity type of your choice.

They have to quote one example and the examples have changed. Thats all.

EdInvestor

The real rate of return you can usually expect from any pot of money invested in a way suitable for retirees long term is c.5%

#With an annuity you will get a bit more but it will be taxed and you will lose the capital - they will use it to pay for guarantee that the income goes on for life

#With a pension drawdown you will get a bit more, you may be able to keep some of the capital, the income will be taxed and can g o up or down

#With an ISA you can get whatever you like,the income is not taxed, it may go up or down, the capital is accessible any time and not taxed

Andy_L

You forgot to mention that the pension is tax free on the way in, whilst the ISA isn't

redimp98

At age 55, I was offered a retirement annuity. The rate..... 3%.
Thanks but no thanks. They grab my lump sum and pay me a rate below inflation, ha.

dunstonh

redimp98 wrote: »

At age 55, I was offered a retirement annuity. The rate..... 3%.
Thanks but no thanks. They grab my lump sum and pay me a rate below inflation, ha.

Pensions are not priced to pay you a decent income at 55. At 65, that would be in excess of 7% which for a guaranteed for life income is higher than you can get on any savings product.

The younger you are, the more favourable income drawdown looks compared to annuity purchase.

Paul_Herring

Andy_L wrote: »

You forgot to mention that the pension is tax free on the way in, whilst the ISA isn't

You forgot to mention that most of the pension is taxed on the way out*, whilst the ISA isn't.

Pensions are essentially tax deferral, not tax free.

*Simplistic statement. This largely ignores the 25% TFC and assumes that the state pension will absorb most of your tax free allowance.

dunstonh

Pension taxation has been done to death and probably best left to another thread. If the pension has been running for many years, then many of his contributions would probably have gone in when basic rate was at between 25-30%. Even recent years at 22% will show a 2% advantage.

If he gets say £6000 in state pensions, that leaves £4k tax free from the pension and the rest at 20%. So, he is still financially better off from the tax relief received even ignoring the 25% taken tax free. It isnt quite as simple to say tax deferred. Although I know what you mean and its only the personal allowances and tax free cash that prevent it from being exactly that.

Andy_L

Paul_Herring wrote: »

You forgot to mention that most of the pension is taxed on the way out*, whilst the ISA isn't.

I didn't need to, Ed had already said it.

jamesd

Charlton King, while the above has covered your initial question, you might also consider whether the pension plan you're in is a modern one with a good range of efficient fund selections or not. If it's an old one it might be worth moving to a modern one to get those benefits.