Low annuity rate values??

norrisg24

Im 51, left my employer last year after amassing 420k in tranferable pension pot value, split across 2 schemes in aviva.

I was disappointed that the statement suggests that retirement at 65 in 2035 - "could" be worth just around 9k a year.

I fail to see how another 14 years investment - even with no more payments going in - will only likely, pay such low returns. I was a high rate tax payer, paid AVC's and even chucked 50k redundancy into the pot.

What am i missing? If i put the values into annuity quotes, but assume im 65 today -i get quotes for 100k lump sum plus around 14k per year. I dont follow this huge difference in outcomes??

thanks

dunstonh

I was disappointed that the statement suggests that retirement at 65 in 2035 - "could" be worth just around 9k a year.

No need to be disappointed about it.   Statement projections are synthetic using pessimistic projections and massively understate the current reality.  Plus, they deduct 2% a year to show the money in today's spending power rather than the actual value.

I fail to see how another 14 years investment - even with no more payments going in - will only likely, pay such low returns. I was a high rate tax payer, paid AVC's and even chucked 50k redundancy into the pot.

Read the assumptions used on the statement.  That will answer why you are getting those figures.

norrisg24

Thanks i understand the assumptions but the problem is not knowing realistic values (i.e,. how to know which assumptions are not realistic?)

I currently have no intention of working til im 65. I have landed another goog job with defined benefits - which is attractive in terms of pension. Ideally id like to know what the values for my pension pot woud be if i gave up "proper" work at 55 and lived off savings and pension and part time work. But not getting realistic values hampers this equation.

I've also requested a quote to put pne of my schemes (worth 90k) into the civil service alpha scheme, as that scheme is only suggesting £2k per year @ age 65 - if i can buy a chunk more defined benefits then this will be attractive.

TVAS

Annuity rates are dependant upon 2 factors interest rates ad life expectancy.
Low interest rates and longer life expectancy means low annuity rates. When one transfers from a DB to a DC one of the risks is the annuity rate risk. This means can you get the same pension amount with the same features, 50% or 66.67% spouse and annual increases as the former DB scheme.
Low annuity rates was one of the drivers for the introduction of Income Drawdown established by the Finance Act 1995 and the subsequent pension freedoms. Essentially if one has a large fund, and has a pension annuity if you die early the insurance company wins if there is no spouse pension.

I can see you have a mixture of DC and DB benefits. You have not told us how old you are now however if you are still able to take benefits at 55 (minimum pension age increases to 57 on 6/4/2028) the consensus is to deplete the non guaranteed DC benefits first (via drawdown) until the DB pension is due followed by the state pension. 

billy2shots

Ideally id like to know what the values for my pension pot woud be if i gave up "proper" work at 55 and lived off savings and pension and part time work. But not getting realistic values hampers this equation.


Your pot is worth £420k which you say in your OP. So that's a great place to start.
What that will be worth in exchange for an annuity when you are 65 is too far off to predict.

Have you considered drawdown Vs annuity. Unless you are totally risk averse then it seems the better option for most people. 

norrisg24

Im 51. The DB scheme has literally 3 months in it, but i can transfer the small DC scheme (90k) in, in return for DB benefits (as yet not received the quote).

In a nutshell what this is about is, if i have to wait until 65 to get 10k or less a year with a pot of 420k - thats a very different picture from, if say, itll most likely be worth 25k a year i.e. i can call it a day a lot sooner. Ideally id like to retire at 55, but with the estimates provided i have no idea what the annuity value could be....even though its only 3.5 years away!?

norrisg24

Another way of putting it might be:

with a 420k if i was 55 tomorrow, what would it buy me in annuity? I'm healthy and dont intend leaving anything after death by way of pension? I also have savings so dont need a lump sum.

Linton

You can see current typical annuity rates at https://www.hl.co.uk/retirement/annuities/best-buy-rates.  These are for people in average good health - were you to have some life limiting medical problems the rates could be much higher.  Annuities are unlikely to be good value until you are much older than 55

Your other alternative is drawdown whereby you keep the pot invested and take an income from it.  Unless you have reasonable investment experience, for £420K it may be worthwhile consulting an IFA for advice on how to manage drawdown to meet your needs.  Very approx reasonable sustainable drawdown rates are about 3.5% of initial pot increasing with inflation,  £15K/year from £420K

Your figure of £14K+£100K lump sum for an annuity would seem to be for a fixed rate annuity without inflation linking.  So if you live til 90 that would be 25 years.  In the past 25 years prices have approximately doubled.  Dealing with inflation is a major factor in planning retirement.

dunstonh

Thanks i understand the assumptions but the problem is not knowing realistic values (i.e,. how to know which assumptions are not realistic?)

Forget the projections.  Take 3.5% of your current value as a guide (as long as you are not investing too low risk).    If you are still paying in, then take 3.5 % of the value plus the amount of your contributions and do 3.5% of that.  Ignore growth.  Consider growth a bonus and cover for inflation.

You wouldn't typically buy an annuity at 55 or ever at all nowadays.  Annuities are a minority option today.

I've also requested a quote to put pne of my schemes (worth 90k) into the civil service alpha scheme, as that scheme is only suggesting £2k per year @ age 65 - if i can buy a chunk more defined benefits then this will be attractive.

Again, the projections are not suggesting £2k a year.  They are projecting £2k year in today's spending power assuming a growth rate before charges (which is probably much lower than reality) with a deduction of 2% for inflation and using an annuity rate which is typically the lowest type you can get but no-one ever uses.     

SouthCoastBoy

Based on what has been said above, I struggle to understand the merit of such predictions if they are no where near the reality, what's the point?

kuratowski

Cynically, the projections could be viewed as a tool to "nudge" people into saving more for their retirement.

More seriously, historically projections were much higher and many savers found they ended up with a lot less than they were expecting.  So regulators are trying to avoid a repeat of that.