Good annuity rate or not?

gundo

I have an old Sun Life Financial of Canada Personal Pension Plan, which I haven't be able to contribute to since 1989. Every year they send me updates and it's now worth the princely sum of £10.5K, when it pays in 9 years time it will be worth £11.3K and they say I could get a pension of £251.00 a year. I've decided that I'll transfer this pension into a Vanguard SIPP and invest it myself in some index fund rather than paying SLFOC a management charge of 1.5% a year and a Investment charge of 1.0%. They sent me a standard letter saying that they had to warn me that I would lose my "Guaranteed Annuity Rate". Well they're quite cagey about what this actually is but considering their forecast of £251 a year I can't say I'm concerned. I could probably equal that in gains in an index fund. Do I need to take these dire warnings about the "GAR" seriously?

kidmugsy

I'm surprised by the notion of a GAR that's less than 2.5% p.a.  So I'd demand to know what the GAR is.

(But don't you have any paperwork that tells you?)

bostonerimus

Get as much information out of them as you can. What is the GAR rate? what rate are they using to calculate your income, it will probably be very low today. etc. Those fees do not look attractive. Whether this annuity is good for you will depend on what it does in your portfolio. For example I have an old TIAA annuity in the US and it pays a minimum GAR of 3%, but it's usually around 4.5% and I use it as a very stable and conservative bit of fixed income that I really plan on leaving to one of my nieces. 

dunstonh

Every year they send me updates and it's now worth the princely sum of £10.5K, when it pays in 9 years time it will be worth £11.3K and they say I could get a pension of £251.00 a year. I

Although its worth noting that they are using SMPI basis projections (as virtually all do nowadays) which means the projections are reduced to show the money in today's spending power.   So, you would get a higher figure than that in future money terms.  Plus, the projections show artificial annuity rates.

rather than paying SLFOC a management charge of 1.5% a year and a Investment charge of 1.0%.

I have seen a lot of SLFOC plans over the years but never seen one with an AMC of 2.5%.  Are you sure that is correct?

Well they're quite cagey about what this actually is but considering their forecast of £251 a year I can't say I'm concerned.

It's not a forecast.  A forecast is something that is likely to happen.   Projections are synthetic calculations using a range of assumptions.    You must not rely on projections for the accuracy of the details about your pension.    The £251 will not be the GAR.

Do I need to take these dire warnings about the "GAR" seriously?

Yes.   They may turn out to be not very attractive but considering you don't really understand that product you have, it would make sense to check the details first.

jamesd

That's a projected growth rate of only 0.82% a year, which seems unlikely. The implied GAR also seems low. More investigating seems needed on the GAR because it's implausibly low unless it is for say an RPI inflation linked annuity.

gundo

Thanks everyone, just spoken to SLFOC and they said the following:
GAR = £57.88 per £1K @65 years old and it increases at 3% per annum. 50% goes to my non-existent dependents/beneficiaries if I die.
So assuming the £11.5K figure is a bit pessimistic then say it was £12K when I retired at £65, I'd be looking at £57.88 a month, if I live to 85 (big if!) then that would be roughly a total of £20K (including the 3% rise every year).
Actually sounds quite good but I'm not sure how this compares with what's available.
Apparently Legal & General actually do the annuities and I could closer to the time I take the pension remove the dependents bit and boost my pension a bit more.

Thrugelmir

You won't obtain a guaranteed 5.78% yield with a 3% annual rise on any fixed interest investments. Might only be small but should be viewed as a component part of your overall portfolio planning. 

dunstonh

GAR = £57.88 per £1K @65 years old and it increases at 3% per annum. 50% goes to my non-existent dependents/beneficiaries if I die.

That is a good annuity rate for 3% indexation.

A number of providers will allow you to alter the GAR terms (such as removing spouse or changing indexation) but use the default GAR as the starting point.  

So assuming the £11.5K figure is a bit pessimistic

As its showing today's spending power rather than the actual value, it is fair to say that.  Plus, provider projections do understate the likely outcome on growth rates.

gundo

dunstonh said:

Every year they send me updates and it's now worth the princely sum of £10.5K, when it pays in 9 years time it will be worth £11.3K and they say I could get a pension of £251.00 a year. I

Although its worth noting that they are using SMPI basis projections (as virtually all do nowadays) which means the projections are reduced to show the money in today's spending power.   So, you would get a higher figure than that in future money terms.  Plus, the projections show artificial annuity rates.

rather than paying SLFOC a management charge of 1.5% a year and a Investment charge of 1.0%.

I have seen a lot of SLFOC plans over the years but never seen one with an AMC of 2.5%.  Are you sure that is correct?

Well they're quite cagey about what this actually is but considering their forecast of £251 a year I can't say I'm concerned.

It's not a forecast.  A forecast is something that is likely to happen.   Projections are synthetic calculations using a range of assumptions.    You must not rely on projections for the accuracy of the details about your pension.    The £251 will not be the GAR.

Do I need to take these dire warnings about the "GAR" seriously?

Yes.   They may turn out to be not very attractive but considering you don't really understand that product you have, it would make sense to check the details first.

To be fair it's not so much that I don't understand the details but that they haven't supplied them. Also re the fees that's directly from my March 2021 pension statement from them:

"Accumulation units have an Annual Management Charge of 1.5%
The AMC is included in the unit price of the fund"

"Investment Charges
...Total Expense Ratio (TER) - depends on the fund"

I finally found the fund (A094A) on sloc.co.uk and the TER is 1.516% and this is the AMC + other fund charges 0.016%.

On my annual statement they'd put down that this could potentially be 1% so I erroneously used that figure. 1.516% is more reasonable. 

Thanks so much for steering me in the right direction.

gundo

A final update. I just rang SLFOC again and they confirmed the details of the GAR and said that I should have had a table in the letter setting out these figures, so they've said they'll send it again and I've asked them to cancel the transfer. It's a pity they didn't provide the table previously because then I would have had the information at my fingertips rather than having to ring. But on the plus side I've learnt a lot about the product and what it's actually doing for me.