OAP with more than £200K

EdInvestor

Hello Aunty Margaret

margaretclare wrote:

However, I'm not too impressed with the remaining 75% being swept into yet another annuity. I'd be glad if you could clarify what you wrote above, about the age from which to buy an annuity?

Here's a description of the plan for the ASP annuity replacement:

https://www1.scoteq.co.uk/static/sxhub/pdf/gen07059.pdf

What would happen is that when you wanted to take an income from the stakeholder, you would move it to a low-cost SIPP and put it into income drawdown ,where the fund remains invested, while paying you out an income based on gilt yields - this can be higher than an annuity.You don't have to take an income if you don't need the money, you can just leave it in the SIPP to accumulate. If you die while your fund is in income drawdown, the capital can be paid to your spouse/dependants/heirs after a 35% tax charge.

Then after the age of 75, you continue with the same arrangement (in drawdown in the SIPP), but the income you can take is cut to 70% .Because the drawdown income limits are higher than an annuity pays, this probably will mean that you can take an income roughtly equivalent to what you would get if you bought an annuity.

At this stage what you have to do is sign up your dependants/heirs as joint members of the SIPP.Then, when you die, they can "inherit" the SIPP ( not the cash in it). It starts to get a bit fuzzy here, as it's not clear yet whether any tax will be payable, and whether (or when) the heirs can take money out, and on what basis.

But it seems to me that a parent will be able to pass on what remains of a pension fund to the kids. It could then perhaps remain invested and grow for some years and provide in turn a retirement income for the inheriting kids - who could then repeat the trick with their own kids.

This seems a lot more sensible than turning the family money over to an insurance company.Especially since it's so tough for young people to save these days, the price of property being so high.

The idea might be quite helpful to people who want to do equity release, but feel quilty (or are under pressure) not to "spend" the kids inheritance.Leaving them a pension instead might be a good alternative, as they get the benefit immediately by not having to save as much for their pensions themselves.

dunstonh

What would happen is that when you wanted to take an income from the stakeholder, you would move it to a low-cost SIPP and put it into income drawdown ,where the fund remains invested, while paying you out an income based on gilt yields - this can be higher than an annuity.

It can also be lower and its not a risk free option. Indeed, its considered to be a high risk option by everyone other than editor.

Because the drawdown income limits are higher than an annuity pays, this probably will mean that you can take an income roughtly equivalent to what you would get if you bought an annuity.

Subject to investment performance and we all know that what can go up can go down.

The idea is fine and and the principle is fine. However, there are a bunch of clauses and warnings that need to go with it. You can end up with less income than an annuity (and most who started these before stockmarket crash did). Drawdown is normally only considered on funds of a 100k or more. Although there are a very small number of providers who will do it on smaller funds (75k).

Drawdown is great for those with other income sources and accept risk based investments. With a bit of common sense and not taking too much income (usually a fair bit lower than achievable on an annuity) it isnt a bad option.

EdInvestor

Drawdown is normally only considered on funds of a 100k or more. Although there are a very small number of providers who will do it on smaller funds (75k).

This is now out of date, with the advent of low cost SIPPs.BTW, these are usually "execution-only", that is, done without "advice", so IFAs don't make any money out of them.Perhaps this is the reason why they seem to be so against the idea of drawdown and SIPPs? :cool:

Of course there are risks with drawdown: but personally I worry more about the absolute certainty (not a risk) that even current low levels of inflation will cut the spending power of a level annuity in half after 20 years.

Anybody who was around in the 1970s (ie everyone coming up to retirement now) will remember that inflation was in double digits and often more than 20% for years on end.Who can guarantee that won't happen again? :eek:

You take a risk with drawdown that your income might fall, or rise, but you keep your capital and can alter the way it's invested and the income you take to suit economic conditions.With an annuity you give away your capital in return for the absolute certainty that your income will fall in real terms.

Which is more sensible? What's the value of a guaranteed income for life if the income won't buy anything?

dunstonh

This is now out of date, with the advent of low cost SIPPs.BTW, these are usually "execution-only", that is, done without "advice", so IFAs don't make any money out of them.Perhaps this is the reason why they seem to be so against the idea of drawdown and SIPPs? :cool:

I dont think you will find any IFA against drawdown. There is absolutely nothing wrong with it if the person going into it is fully aware of the risks.

I just ran through the list of 32 currently available of drawdown contracts:

4 needed £150,000 min
11 needed £100,000 min
4 needed £75,000 min
6 needed £50,000 min
1 needed £37,500 min
1 needed £20,000 min
1 needed £2,000 min
4 failed to respond

This is after tax free lump sum is taken. So yes, you can do it if it is less than 100k but you are not exactly spoilt for choice. (the list is not exhaustive, it was just a quick check with one research software product with filters to remove with profits).

but personally I worry more about the absolute certainty (not a risk) that even current low levels of inflation will cut the spending power of a level annuity in half after 20 years.

That is your personal view but it is dangerous to impose your personal risk profile onto others who may not want that risk with retirement income.

Anybody who was around in the 1970s (ie everyone coming up to retirement now) will remember that inflation was in double digits and often more than 20% for years on end.Who can guarantee that won't happen again?

Also a time when interest on savings accounts didnt keep up with inflation. Not much did keep up with it. Property, stockmarket and index linked products. If it was to return, there will be less worry for those with pension incomes than those who have over borrowed to purchase buy to lets and those that would have a problem facing a small increase in mortgage rates, let alone a big one.

If it was a fear for you, then index linked annuities are available.

There are an awful lot of people out there that wish they had never done drawdown because they have seen their capital drop and their income go down. Drawdown works best when you take as little income as possible as you need less growth on the plan to make up for it. People save for retirement to provide an income. To then be asked to take as little as possible is not going to be a solution for the average person.

Which is more sensible? What's the value of a guaranteed income for life if the income won't buy anything?

For low risk people, an index linked annuity. For high risk people drawdown is an option.

You keep pointing out the negatives of the annuity and the positives of drawdown. Perhaps you should point out the positives and negatives of both.

EdInvestor

dunstonh wrote:

There are an awful lot of people out there that wish they had never done drawdown because they have seen their capital drop and their income go down.

Incompetent IFAs are mainly to blame for this.

For low risk people, an index linked annuity.

As you know, these are appallingly expensive, only for the rich.

You keep pointing out the negatives of the annuity and the positives of drawdown. Perhaps you should point out the positives and negatives of both.

Happy to do so, but it's off topic for this thread - I was meaning just to point out the mechanism of how you avoid the annuity, in response to margaret clare's query - in her case risk is not really the point.

margaretclare

Hi Editor

Thanks very much for the good advice. I'm reading and trying to take it all on board. Maybe a little more details will help - feel free to move if you think I've hijacked the OP's thread. Unlike her I don't have £200K - I should only be so lucky!! I'm also not that concerned about leaving money to descendants. Whatever is left of my estate after my husband, is planned to be split between 5 grandkids - 3 of mine and 2 of his, and that includes possibly around £100K equity after the equity-release lifetime mortgage is paid off. We have back-to-back wills so all the grandkids will get treated equally - I'm not one of those people who thinks of 'ring-fencing' some of 'my' estate to 'my' family and not his.

I have an annuity from Guardian - £1463 arrives every September. I have another one, approx £500, arrives every July. I also have a monthly annuity pmt from Prudential, just over £90. My mistake was in starting another personal pension with National Mutual which was growing well, but I took it out too early, hence £500 every July (i.e. the mistake was not in starting it but in not leaving it alone for longer)! The others are from previous employments. Hence my wish not to have yet another annuity from 2010!

I don't need all my income at present - the annuity pmts tend to get used for e.g. either a holiday, things around the home etc. We're replacing and renovating now because maybe in 10 yrs' time we won't feel like doing it. If I die first I'd like to bequeath something to my husband - the stakeholder pot is assigned to him, but once it's converted to an annuity (if that is still compulsory) it's out of our control.

Your thoughts are welcomed.

Margaret Clare

fenlander

Thanks again for more advice which , like Margaret Clare , I am trying to assimilate !! At Natwest this am, the `Senior Premium Banking Manager ` from ` Retail Banking , Personal Banking Office `, Norwich, says that he knows nothing about Pensioner Bonds or Annuities , but he does know a man who can who is an `independent financial advisor `employed` by the bank. QUE???
However, the bank itself offers me Advantage Reserve , with instant access, int pd 1/4ly, paying 4.35% gross, and 3.48% net . He was also pushing telephone based savings accounts paying 4.20% gr and 3.36% net, and worse online accounts , at 4.60% and 3.68% net . He also says that the bank charge £16.50 per month to `administer` this frist Advantage Reserve account which amounts to £200. I asked if there was any risk of losing the capital amount , and he said no, and I asked if there were any other hidden costs, and he said no . I daresay you are probably laughing out there !!!!! but I don`t see a lot wrong with this !!!!!! but I will see his `independent` FA nevertheless to see if there is any major benefit in the annuities and the Pensioner bonds . Unlike Margaret Clare , I have no one to leave this to , in the way of family , and really just want to be sure it will last me , I don`t want to get a dog a begging bowl and a recorder and sit outside Natwest in Norwich at 80 when its all gone !!!!!!!!!!!! Out of 10 , how did I do ?

dunstonh

Quote:
Originally Posted by dunstonh
There are an awful lot of people out there that wish they had never done drawdown because they have seen their capital drop and their income go down.



Incompetent IFAs are mainly to blame for this.

No they are not. Its the equity markets that are blamed for that. IFAs do not a a crystal ball and consumers are no different.

For low risk people, an index linked annuity.

As you know, these are appallingly expensive, only for the rich.

I dont know where you get the idea that these are expensive. The annuity rate for a 65 year male (non smoker, good health) with RPI linking is 5.1%. Level on same terms is 7.08%. I

EdInvestor

Margaret Clare & DH

I think it's best if we start another thread later to talk about the whole annuity and income drawdown thing.

Fenlander

What's your position apart from the 200k? Do you have pensions? A home (mortgage paid off?) What income do you need to get from the 200k? Is 5% net enough?

You can do a lot better than the bank with even safe investments.

If you are willing to take a bit of managed risk with some of the money (50k?) then you may be able to get your capital and income to grow over the years, so it is not eroded by inflation.You may not however need to do this, depending on what other assets/pensions you have and how much you think you'll need to live on.

Can you tell us a bit more?

deemy2004

yeh, better placed in the pensions area... As the OAP defiently does not want to shuffle part of his £200k into an pension product !