Example Annuity On 100K Pension

Joey122

Hi,

Suppose I have a 100K pension when I reach 55 - What will I receive each year if I dont take 25% tax free lump sum?

Is there a table which affects annuitys? Also is this yearly payment guaranteed for life?

The average age of a person is 85 so the pension company will have to pay this for the next thirty years I suppose?

Thanks

Joey122

As things currently stand , if you have a private pension you also get the state pension - Is this correct?

If someone did not have a pension , what else would they be entitled to other then the state pension?

Basically I m trying to work out whether it is worthwhile having a private pension or not.

dunstonh

Suppose I have a 100K pension when I reach 55 - What will I receive each year if I dont take 25% tax free lump sum?

As a very rough guide, you would be looking at around 5.99% for male, single life, level (non smoker, good health). For RPI it would be 3.42%. Taking the TFC is usually a good idea as you can reinvest it for income. Also, at that age, income drawdown may be an appropriate solution, despite investment risk, as you can defer the annuity purchase until a much later age and get a better rate. However, that is down to risk profile and opinion.

Is there a table which affects annuitys?

The FSA publish a table but it should be a guide only because the data is not updated as quickly as the markets move the prices. Plus, it assumes RRP and you can often get bettter than RRP. Especially if you are a smoker or have health conditions. Fund values can also influence the annuity rate.

Also is this yearly payment guaranteed for life?

Yes.

The average age of a person is 85 so the pension company will have to pay this for the next thirty years I suppose?

Some will live 50 years, some will live 1 year. Its the pooled risk of annuity purchase. It takes around 16-17 years will break even.

As things currently stand , if you have a private pension you also get the state pension - Is this correct?

Yes.

If someone did not have a pension , what else would they be entitled to other then the state pension?

There is pension credit but it is based on your savings, investments and income from other sources. It is designed to bring you upto a breadline minimum income but it is very low and not something to aim for. Its a little over £9400 a year for a couple or £6118 if you are single.

Basically I m trying to work out whether it is worthwhile having a private pension or not.

Depends on whether you feel like living on just over £6k or £9k is what you really want from retirement?

Joey122

Sorry - On a 100k pension - How much would you get a year from yje private pension ? Are you saying 6% ie 6K? Thats not much at all!!!

The state pension is 100 pounds a week if I m not mistaken

Also is this subject to tax?

ie: 11K (6K + 5k state) - Will this be income taxable?

dunstonh

Sorry - On a 100k pension - How much would you get a year from yje private pension ? Are you saying 6% ie 6K? Thats not much at all!!!

Not at age 55 it isnt. It has to pay out 10 years longer than it was really designed to do. At 65, it would be 7.31%. If you are retiring after 2024, your state retirement age is going to be older as well increasing to 66 at 2024, 67 at 2034 and 68 at 2044.

This is why income drawdown is more attractive for those commencing their pensions early.

The state pension is 100 pounds a week if I m not mistaken

You are. It is £87.30 per week.

Also is this subject to tax?

Yes. Although you will have your personal allowance still (which increases at 65 although that is likely to follow the increase in age with the state pension).

There is the second state pension as well. Although it is probably not worth relying on that. Self employed dont qualify for it anyway and the maximum you can get paid on it if you are starting out now is around £3900 a year. Most people though get much much smaller amounts. The reason you shouldnt rely on it is that unlike the basic state pension that will remain around, the future of the second state pension is less certain. A number of MPs and research instigated by MPs in various reports has suggested that a move to a single state pension should take place. For a while, it looked possible under Labour but they backed down. The Govt has reduced the benefits of the second state pension/SERPS 3 times already. So, its worth basing your retirement provision with it not included. If you then get it, its a bonus.

EdInvestor

The FSA annuity tables are here:

http://www.fsa.gov.uk/tables

Current rates for a male 55, single like level annuity no guarantee are 6,120.p.a, taxable

New rates for state pensions (also taxable) are as follows:

Basic state pension: 90.70 pw : 4,716 p.a
Pension credit 124. pw : 6,448 pa

A full NI record for the state second pension for a person on average salary would produce a state pension approx double the size of the basic, ie around 9k.Get a personal forecast here (but not until late next year as computer is being sorted): www.thepensionservice.gov.uk

Because it is index linked and provides a 100% spouse pension, the basic state pension would require a pot of c.150k to buy on the market.

New tax allowances are not yet published but the Goivt has indicated that age allowances (65+) are to be rapidly increased such that they will reach around 10k p.a by around 2011.

When computing pension savings at the lower end you should get a forecast of your likely 2 state pensions and then aim at filling the gap (if any) between them and 10k with a private pension.(this assume basic rate taxpayer and no free money from employer).

jamesd

Joey122, say you get only 5% growth on your pension investments after inflation at 3% and retire at 55. Here's the annuity pension at 6% annuity rate that each 80 a month (100 after tax relief) of pension contribution would buy you in today's money:

If you're 20: 6,845
If you're 25: 5,015
If you're 30: 3,590
If you're 35: 2,475
If you're 40: 1,610
If you're 45: 935
If you're 50: 409

So pick your desired income and start investing whatever it takes to get there.

Past results suggest that investing the money well and regularly monitoring and adjusting the investments will do better than this.

If you're not a higher rate tax payer but expect to be one you might consider using stocks and shares ISA investing until you're a higher rate tax payer, so you get higher rate tax relief if you shift the ISA money to the pension.

Milarky

It is slightly off-topic but am I alone in considering it strange the way annuity rates (for that is what they are) are referred to the sum of annual pension one would receive on a mythical sum of £100,000 (since no one retires with exactly that sum anyway)?

In reality, it is just a disguised percentage. Percentages have a use (as measures of fractions) and they are taught in all schools. Is there any benefit in using disguised percentages as opposed to the real thing?

(I suspect there is - and that it comes down to most people - sadly - not being able to translate a percentage naturally themselves. For instance if I say "You have £123,000 and you will get 7%" that is actually less tangible than if I said "You have £123,000 and you will get £7,000 plus 7% of 23,000 altogether")

dunstonh

Its possible they use values rather than percentages in examples as the annuity rate is influenced by the purchase value. Although they could publish tiered rates as savings accounts do.

Looking at it from the IFA side, a lot of the stuff we see quotes percentages or incomes based on the correct fund value. The £100k example just seems to appear for tables.

EdInvestor

If you used percentages, people would think it was like getting interest on a bank deposit, especially as the figures are currently fairly similar. It would make them even more annoyed when they realised they would lose all their capital for this pathetic return.The fact that it's taxable just adds insult to injury.