Fixed Term Annuity - Use Part of Drawdown, Or The Whole Hog in This Product?

GSP

zagfles said:

GSP said:

I’ve just looked at Canada Life’s Retirement Income Plan Product Details.

Under Death Benefit, it says “ If you die before the end of the term, we’ll provide a guaranteed death benefit. This will be the original purchase price minus any income paid to you before tax, up to the date of your death, and any adviser charges you have instructed us to pay”.

I was thinking of putting in £585k to receive back £500k after five years.
For the £85k less at the term end, as an income I would receive currently £44,198 a year, or £220,990 over the five years.

So from my understanding, if I managed to die say 4 years 10 months in, that ‘death benefit’ would reduce my ‘guaranteed lump sum’ from the ‘original purchase price’ (£585k) to my OH by say £210k to c£375k?

It's interesting comparing this to what you'd get if you just bought a similar gilt (or gilt ladder). Making it very simple, if you were to sort of replace this with a single gilt, TR28 https://www.londonstockexchange.com/stock/TR28/united-kingdom/company-page which matures Dec 2028 and is currently trading above par at 107.86, so to buy £500k worth would cost £539,300 and would get an annual income of £30,000 with £500k return guaranteed in Dec 2028.

So that would leave £45,700 spare from the original £585k, which could be simply split across the 5 years with a bit of interest would likely get a bit over £10k pa extra to add to the £30k, making a bit over £40k annual income.

So it looks like the FTA gets about £4k income more than simply using a gilt, with the downside that if you were to die during the term your beneficiary would likely lose something between 0 and £135k compared to the gilt. Looks like there's about a 5% chance on average of death in 5 years from around 60 to 65, so the extra income comes partly from the mortality credit (you gain a bit if you don't die, your beneficiaries lose a lot if you do, but the former is the most likely), but not sure this fully explains it, unless you have health issues? 

Or else the insurance company isn't relying on gilts, but they surely have to use 100% guaranteed investments?

In reality you probably would use multiple gilts anyway, just a back of a fag packet comparison...

Thanks for that Zagfles.
Overnight I have thought of something to bridge the £100,000 shortfall if I was to die 4 years 10 months in to my Fixed Term Annuity. 

A Term Life Insurance Policy for five years!
Okay, according to one quote this will cost £30 a month for five years, but sure the £1,800 outlay is worth it?

wjr4

Trapdoor said:

@GSP … £12k to setup your FTA 😱 … mine will be for a slightly lower purchase price and they were talking about fees not exceeding £2k, and that’s also with setting up the bond to hold my TFLS.

Have they also recommended putting some into an ISA? Also, I previously asked if they are partners of SJP as an investment bond is a bit of a strange product to recommend in this instance. 

GSP

Trapdoor said:

@GSP … £12k to setup your FTA 😱 … mine will be for a slightly lower purchase price and they were talking about fees not exceeding £2k, and that’s also with setting up the bond to hold my TFLS.

There are a few ‘issues’ with mine going forward, not least of all an issue with an ‘administrative error’ that has significantly delayed getting things in place before my Canada Life quote (at the old, higher rate) expires … I’m banking on my IFA coming to see me tomorrow to sign the necessary forms to get my FTA in place.

Like you, I’m less bothered about growth … I have two DB pensions currently running which have indexation, one being an NHS pension. I’m currently self employed and can scale up or down work (if I decide to continue at all) … the decision on my SIPP is to try and protect from further losses … I know the FAs all claim that “we’ve had a few bad years” and that things will improve, and those on here that say that the money out at the end of the term will have been ravaged by inflation, but I’ll be getting north of £30k a year for 5 years … if I drew down £30k per year for the next 5 years, would my SIPP be more or less than it is now? Well, they can’t answer that, but who knows what other future shocks are being baked into the financial system … and 5 years hence my SP kicks in at >£10kpa … I’m hoping my only worry going forward is keeping under the 40% tax rate!

Now just waiting to find out whether my run of bad luck on Premium Bonds continues this month … £50k holding and a staggering £225 in winnings over the past 12 months with 6 of those (and the past three) being £0 wins 😖🙄

I do hope you get those forms signed in time Trapdoor. After deciding on your plan, when you said ‘go’, just wondering how long it has taken to get to this stage?

There wasn’t any mention of his fees when we met with the IFA on Friday, so it’ll be ‘interesting’ if that’s the word when he does mention.

Like you by the sounds if it I do listen to comments from all sorts of sources, but make a decision on what you believe most. Too many ‘experts’ have called it wrong, or not called it all. I don’t feel there will be a notable recovery for some time, even much worse may lay ahead if my worse fears come true. I just want a bit of financial peace and security and stability for a while while these rates look more attractive, and not worry about things outside of my control.

Trapdoor

wjr4 said:

Trapdoor said:

@GSP … £12k to setup your FTA 😱 … mine will be for a slightly lower purchase price and they were talking about fees not exceeding £2k, and that’s also with setting up the bond to hold my TFLS.

Have they also recommended putting some into an ISA? Also, I previously asked if they are partners of SJP as an investment bond is a bit of a strange product to recommend in this instance. 

I don’t have any ISA allowance left until April so that wasn’t an option. It was discussed but the issue being that a) it would take 8 or 9 years to load into an ISA b) whilst rates are currently quite good, the Bond (Prudential) is likely better and c) we don’t know what an incoming socialist government /coalition may do to ISA allowances or the tax status.

And no, they are not partners of SJP … it’s a fairly large and reputable financial management company not associated with any provider.

Albermarle

c) we don’t know what an incoming socialist government /coalition may do to ISA allowances or the tax status.

You should not really make decisions based on hypothetical future scenarios regarding government tax policies.

In any case I can't see changing the status of ISA's is going to be on any new governments priority list, especially considering Kier Starmer and crew are not exactly Red in Tooth and Claw  

Malthusian

Trapdoor said:

I don’t have any ISA allowance left until April so that wasn’t an option. It was discussed but the issue being that a) it would take 8 or 9 years to load into an ISA 

Not necessarily - you can transfer cash ISAs to stocks & shares ISAs and hold back some of the unwrapped money that you were planning to invest in the bond. 
The higher the total return, the more tax you save, so generally you want your ISAs to be used for investments and your emergency cash unwrapped.

b) whilst rates are currently quite good, the Bond (Prudential) is likely better 

Any investment is likely to beat any cash product over the long term, other things (including tax wrapper) being equal. The question is why an onshore bond is better than unwrapped, when for most people unwrapped is better.

 c) we don’t know what an incoming socialist government /coalition may do to ISA allowances or the tax status.

That sounds like a reason not to use an onshore bond as they are more difficult to get out of without a disproportionate tax bill, compared to unwrapped investments.

Doing something tax-inefficient in the hope that a future socialist government makes it a good idea retrospectively  rarely works as a tax strategy. (What socialist government? The biggest socialist party in the UK has about 5% of the vote and one seat in the Commons.)

wjr4

Trapdoor said:

wjr4 said:

Trapdoor said:

@GSP … £12k to setup your FTA 😱 … mine will be for a slightly lower purchase price and they were talking about fees not exceeding £2k, and that’s also with setting up the bond to hold my TFLS.

Have they also recommended putting some into an ISA? Also, I previously asked if they are partners of SJP as an investment bond is a bit of a strange product to recommend in this instance. 

I don’t have any ISA allowance left until April so that wasn’t an option. It was discussed but the issue being that a) it would take 8 or 9 years to load into an ISA b) whilst rates are currently quite good, the Bond (Prudential) is likely better and c) we don’t know what an incoming socialist government /coalition may do to ISA allowances or the tax status.

And no, they are not partners of SJP … it’s a fairly large and reputable financial management company not associated with any provider.

I’m confused what you mean by rates for a Prudential investment bond? There are no rates, it’s based on investment returns which are not guaranteed at all. They shouldn’t be projecting any rates at all unless it’s the standard rates on the illustration. 

I really hope the adviser isn’t telling you point C. 

(The reason I mentioned SJP is because they have a tie in period of 6 years with investment bonds)

Malthusian

wjr4 said:

I’m confused what you mean by rates for a Prudential investment bond? There are no rates, it’s based on investment returns which are not guaranteed at all. 

Trapdoor didn't actually refer to the Prudential investment bond having rates. (As I read it, they said "while [cash interest] rates are currently quite good, the Bond (Prudential) is likely better". Not "the Bond's are better".)
That said, dollars to doughnuts this is a Prudential With Profits bond (aka PruFund) which does actually have a rate - specifically an "expected growth rate" (aka a "regular bonus rate").
If the PruFund's investment returns are close enough to the expected growth rate, you get the expected growth rate. If they are too much lower, the fund switches from the "smoothed" (pretend) price to the true price of its investments (creating a sudden drop in the advertised price). 
Have a look at a graph of the unit price and zoom out to five years to see how this works in practice.

GSP

Trapdoor said:

@GSP … £12k to setup your FTA 😱 … mine will be for a slightly lower purchase price and they were talking about fees not exceeding £2k, and that’s also with setting up the bond to hold my TFLS.

There are a few ‘issues’ with mine going forward, not least of all an issue with an ‘administrative error’ that has significantly delayed getting things in place before my Canada Life quote (at the old, higher rate) expires … I’m banking on my IFA coming to see me tomorrow to sign the necessary forms to get my FTA in place.

Like you, I’m less bothered about growth … I have two DB pensions currently running which have indexation, one being an NHS pension. I’m currently self employed and can scale up or down work (if I decide to continue at all) … the decision on my SIPP is to try and protect from further losses … I know the FAs all claim that “we’ve had a few bad years” and that things will improve, and those on here that say that the money out at the end of the term will have been ravaged by inflation, but I’ll be getting north of £30k a year for 5 years … if I drew down £30k per year for the next 5 years, would my SIPP be more or less than it is now? Well, they can’t answer that, but who knows what other future shocks are being baked into the financial system … and 5 years hence my SP kicks in at >£10kpa … I’m hoping my only worry going forward is keeping under the 40% tax rate!

Now just waiting to find out whether my run of bad luck on Premium Bonds continues this month … £50k holding and a staggering £225 in winnings over the past 12 months with 6 of those (and the past three) being £0 wins 😖🙄

I have just had an initial call with my IFA to discuss a few fixed term annuity options.

For the Canada Life conditions where if you die 4 years 10 months into a 5 year year term and they would subtract all the income from the original purchase price. This can be offset by taking out 5 year term life insurance. It would cost £30 a month over 5 years totalling £1,800, but would return an additional £100k to my OH if I died.

The fees are 1%, so a fixed term annuity of £585k would take £5,850 to set up.

Malthusian

Presumably the life insurance has been compared with the cost of taking out the annuity with a 5 year guarantee period or 100% Value Protection? 
If the adviser is also proposing to take commission for setting up a life insurance policy it sounds a leetle like double dipping, although it is theoretically possible that the cost of the separate life insurance policy could be lower than the extra income from a fixed term annuity with no death benefits.
Although a separate life insurance policy also means a separate underwriting process. Are you going to get the life insurance on-risk first before you get the annuity in place? Otherwise you can't know for sure that it will be cheaper than building the insurance into the annuity.