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The fun of Annuities


Dave225

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Just to say that today We arranged an annuity for my wife Now I would love to say that it was humungous and the annuity will allow us to live a life of luxury till our dying days, but unfortunately it fits in with many of the population in paying enough each month for about 3 coffees per week. Not that we will say ‘no’ to the coffees as it helps to keep one sane in the morning.

 

Now getting this annuity allowed us to see parts of the financial industry that maybe should remain covered. Why?

 

Well, as mentioned we are not talking mega pots of money here mainly because my wife, like many women of her generation, spent time bringing up kids, and due to my wandering the world in search of work, had to forego her career and take menial jobs as and when they became available. This meant that she was not able to create either a large pension pot, or have a lovely taxpayer funded pension to retire on. Instead she built up this very small pension fund. However, in the last few years we did make contributions mainly to get the fund size large enough where Companies would not just laugh at us and say ‘go away’. Before Clive mentions Triviality I would state that her total exceeds that limit....just, so that option was not available to us. So, on applying to get this annuity the Life Company duly sent us a number of options available to us. These included a single life guaranteed for 5 years or a tax free 25% and single life guaranteed for 5 years. No joint life options were offered as probably they felt it was too small., or they could not be bothered. Now, as all the pundits tell you, get advice and an open market option and you will increase this offer by 20%, or so they say. Well, we did just that. We contacted a reputable IFA here in Edinburgh, gave them the figures and asked if they could assist us. They responded immediately, which was good, with a comment that ‘an adviser will contact you shortly’. Unfortunately, the adviser took a further 3 days to actually contact us, because 'she had mislaid our telephone number' which was annoying because the quote we had received from our Life Company was only valid for 14 days. Not a lot of time to sort it out. Possibly that is deliberate, I do not know. Well, we eventually made an appointment with the adviser after 6 days and ‘she’ arrived to discuss our situation. She was very nice but it was apparent she had done very little to actually see what was available. She produced 1 set of figures, on an Excel spreadsheet, which on the top line showed an annual payment of £39 more than we had been offered for a single life by our own Life Company, so that was a good sign. We then asked about taking 25% tax free and what that would give us. Her answer was a figure £16 less than our original Company offer, so not so good. I then asked whether she operated on a commision basis or fee basis. The answer was fee basis and the costs were £500 to ‘complete the paperwork’. Well, we had looked at the paperwork we had received and completion was 3 pages mostly of box ticking. Also her £500 fee would require us to receive the larger annuity for 13 years before we broke even. Now maybe there was a minimum fee but she could have advised this immediately she received our enquiry, as she had our fund size, but did not. She waited 6 days to tell us. Maybe she was hoping we would just fall in line and give here the business. Sorry, I do not work that way. So, we regret to say we advised her we would probably do everything ourselves. As, by now we only had 3 days left in which to accept out original offer, we had to hurredly complete the forms and get them sent away recorded delivery. Now, maybe we could have looked at other IFA's but the chances of better success were an unknown quantity, and again the original offer had a very short life span. As the various quotes over the last 6 months had all gone down, I suspect the same would have happened if we had asked for another new quote. Annuities are not at rock bottom but getting there fast. Bluntly, any money invested has been ‘stolen’ by the life Companies, even if you, the punter, thought you were doing the right thing.

 

So, my conclusions.

 

If you are like the vast majority of people and only have small pension pots, then try to do it all yourself as the IFA’s are not really interested. Also, the Life Companies will try to make life as difficult as possible for you so you end up with as bad a deal as they can get away with. This is blatant theft, but evidently legal. If you are nearing the stage where you have an annuity maturing then beware. The most likely return you will get is about 4.3% unless you are ancient or coughing to death with cancer. If you have paid management fees then I am sorry, but you have really been screwed. Take the 25% tax free as you can get 4% in a deposit account. If you can stand all the spam e mails you will get, possibly try to get quotes from a number of Companies yourself, but beware, these initial quotes are always ‘teasers’ and what you will actually get will probably be 10% less or more. There will always be ‘exceptional circumstances’. If you wish to try an IFA, find out the costs first as most are not interested in ‘small people’. Curious as they occupy about 90% of the population. Again, the main problem is time as your original Life Company will only keep their quote valid for a very very short time, not really enough to check out the market correctly. Again, this is deliberate.

 

Some of you will correctly say. Look, stick it all under the mattress’. Maybe you are right, but were you right 30 years ago? In the 70’s and 80’s you were not allowed to have a personal pension if you had a Company pension and most Companies insisted you join the pension scheme as a condition of employment, but if you left before 5 years, all you got was your contributions back and no option to replace that time privately. So, you were screwed twice. That happened to me 3 times as I took the short term option of higher salary. . I have no doubt that Pensions will in due course turn out to be one of the biggest fraud schemes the Uk has ever seen, and encouraged by Governments of all hues. Of course public sector workers will escape these obstacles as they are all funded by the taxpayer., but even here I suspect that in time they will suffer similarly.

 

Meanwhile, in about 3 weeks time my wife and I are off to enjoy coffees courtesy of her annuity. Now if people feel that as a result of reading this we need food parcels to be sent, the please ensure the quails eggs are fresh, but truthfully, we will manage as we made 'other arrangements'. However, being screwed is not something we enjoy.

 

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What are you whinging about, I at one time worked for 'big bob', I was one of the fortunate ones who escaped with converting back to government pension, many have zero. The last tory government of John Major did bugger all to sort out the pensions mess, the last Labour government said they would sort it then robbed the pension funds and the present government have carried on where labour left off.
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Yes - a real problem for those who have a small pension "pot". Annuities follow interest rates and are at an all time low.

 

We are also under pressure to charge fees rather than take a commission. Which suits us as that is how we prefer to work - with he exception of pensions where tax relief is available. A fee of £100 becomes £120 with VAT for the client. A fee of £100 collected via a commission becomes £60 for a higher rate taxpayer and £80 for a basic rate taxpayer.

 

We just explain that to people and let them make their own mind up.

 

The standard commission on an annuity is circa 1% so if your wifes fund was just over the triviality limit (£18,000) then we could assume circa £20,000 - so the commission would be £200.

 

A £500 fee is ridiculous on such a sum. I am surprized the IFA even came out to see you for that. We have calculated that it costs us £382.00 just to open a file on a new client (admin, compliance, FSA fees and FSCS levy etc.) We would insist you came to see us or handled you case remotely via secure emails. In any event we would have given you an hour of free advice and in that time gone onto our systems to provide you with the full range of OMO's from the whole of the market.

 

We would also have discussed the concept of Drawdown and Phased Retirement. We would have coverred recycling the income as well.

 

Phased Retirement is what most people do these days because frankly annuities are too low to be considerred a viable option.

 

If you have a fund of £20,000 and if you have no real need for the 25% TFC then Phased Retirement (also know as staggered vesting) works by your taking slices of TFC rather than taking all of it and using that as your "income" and then reinvesting the taxed income to get the tax on it back.

 

So via the annuity route if you had £20K - take the tax free cash of 5K that leaves you £15,000 and if we assume an annuity rate of 5% that will give £750 a year gross - £600 net of BRT or £50 a month. If you die the money in the pot goes to sponsor those lucky people with the same annuity provider as you who live longer than you do. You do not know them, probably never met them, but on you death bed you can marvel at your charity.

 

In contrast - if you want £600 a year income - why not leave the pension fund invested but take out £2400 and take the tax free cash from that - which at 25% is £600. This leaves £17,600 still invested in the pension which is fully returnable to your loved ones tax free in the event of your death. Compare that to an annuity!!

 

So with Phased you have your £600 "income" and you have £17,600 still YOURS! - You also have £1800 that you have had to buy an annuity with (poor value as we have already discussed) so we would suggest a Drawdown plan where you can take a small income - and it would be small - probably circa £90 a year gross or £72 net - but you can pay this £72 back into a Stakeholder Pension and get the tax relief back so that the amount invested is £90. An should you die, this £90 is fully returnable on death tax free.

 

Sadly the £1800 in drawdown will suffer a 55% tax hit on death (YES!! - that is correct - 55% tax!!) - but even a 45% return is better than the zero return you get from an annuity.

 

In subsequent years - hopefuily there is growth in the pension pots and you simply repeat the above each year until the "slices" of income you take add up to the income level you require and at that point you stop reinvesting this income and actually take it as income.

 

If History repeats itself you should have a reasonable pot still invested in your pension for future access (and a benefit to you kids on your death) and a secure income that you have built up over the years rather than locked yourself into an annuity now when the rates are at an all time low.

 

Sorry Dave - but I think you have been badly advised here. Annuities are crap (techincal term for "not being very good") at the moment and frankly - if the adviser you used a) came out to see you knowing the size of the pot you had and b) did not come fully prepared to that meeting having c) not botherred to gather all the information by phone/email etc. and then d) not coverred all your option - then a poor job was done by her.

 

Interestingly - if you had have taken her advice and your wife had subsequently died such that you and you family "lost" the fund having only got a few years income - then, if she had NOT outlined the full range of benefits of all the possible options as I set out above, then you (and your family) would have a valid complaint that would be upheld by the FOS as past case history has shown.

 

(Note - If you want/need the TFC to pay off expensive debts or whatever - there are things called Flexible Annuities where they take your £15,000 (after your taking the £5000 TFC) ask you what income you want up to a generous limit of circa 7% pa, calculate what that is over three years (£3150 - i.e. 7% = £1050pa x 3 years = £3150) put that "aside" within the Flexible annuity to give you your incom over the three years and they invest the remainder with the idea that if the fund grows at a reasonable rate then at the three your point, you are three years closer to death than you are now and so your annuity rate has gone up and that, with the fund growth achieved AND (hopefully!!) higher interest rates and annuity rates in three years time - this could allow you to take another three years of income higher than the rate you lock yourself into by purchasing a full blown annuity now when you are "young".

 

A bit of a gamble I grant you - but then so is banking on todays shockingly low annuity rates remaining this low.)

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Guest pelmetman

Just been down the same path with Sue's small pot, in the end took the lump sum and have decided to gamble the rest *-).............with an investment annuity, she's gets a lump sum a year arrears :-S

 

My private pension pays out next year if I want it at 55........no doubt by then it'll be completely worthless ........................fortunately we have both have 10 years worth of gold plaited, tax payer funded, civil service pension B-).....

 

Private pensions are a waste of money, I wish I'd never bothered and I definitely would only advise wealthy people to bother with them as they're a useful tax dodge, anyone else is just ensuring they won't get any pension credits *-)

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Absolutely correct Dave - If you are a higher rate tax payer then a personal pension makes sense. If your employer matches your contributions then again - a pension makes sense.

 

But for those who are self funding forget it. There are far better other options out there.

 

Biggest problems are a) the taxman now taxing the growth - so what little is available is reduced still further! and b) the annuity rates available are so low that just to get your fund back you have to live longer than the average life expectancy.

 

If you want to build up a fund for retirement then we suggest Investment ISA's and Offshore savings - in particular Offshore Investment Bonds as you can access tax free and tax deferred income from them respectively. But overall we recommend both this route and other routes such as buying property to rent (tho extreme care needs to be taken exactly how and where you do this) - the return is very good - IF you get it right AND costs are tax deductable.

 

Only last month we suggested to a couple that had inherited a property that they should take out a mortgage on the rented property and pay off their own mortgage.

 

"What's the point of that?" they said "A buy to let mortgage is a bit more expensive rate wise than an own home loan!"

 

We said "Yes it is but only marginally so - but the main difference is that you cannot get tax relief on your own home loan - but a buy to let mortgage is fully tax deductable."

 

The savings were substantial - and all the sweeter because it was a tax saving.

 

Like everything - it is not for everyone - but if I had my time again I would buy a "do-upper" do it up rent bit out use the income to buy another.

 

From having a superb savings culture - past governments have destroyed it - such that unless you are in the Public sector with a pension courtesy of the taxman you are better off not touching them at all.

 

And you can see that the powers that be are now getting rattled because the black economy is taking off and so we get comments that paying cash is morally wrong.

 

The worry for them is that we are going the route of Greece et al and developing a thriving economy but one that is out of the loop re tax.

 

It is likely to get worse. It is a direct result of those that have taking more out of the pot than those that have little.

 

Tax on funded pensions

 

fuel duty with VAT on top.

 

Insurance premium tax

 

VAT at 20%

 

........... the list goes on.

 

As an IFA I stopped funding my pension some years ago - so that should indicate something I would suggest.

 

 

 

 

 

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Guest pelmetman
CliveH - 2012-07-24 5:11 PM

 

As an IFA I stopped funding my pension some years ago - so that should indicate something I would suggest.

 

 

I hope Mr Prudential is not reading this Clive 8-)...............they'll have a contract out on you :D

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Clive makes, as usual, some valid points but.... some of the things he recommends were not available in 80's and 90's such as ISA's or yes, we would have tried them. I also mentioned my wife's pot was small, and if it had been 20k then we may have been a bit happier. Unfortunately, it was not, and again I put part of that back to things he has said in the past about not adding to pension funds nowadays, so we added the barest minimum only in the last couple of years. The reason was that the original sum was so small as to be unobtainable unless we topped it up. It was created as a result of Contracting out many moons ago. Maybe we could have looked at contracting back in but my wife already had a full State Pension years as we had paid them through Class 3. So, this was the best option we felt. If she lives 10 years we make all our money back, if not we lose a couple of grand so not major unhappiness, except that I lose my partner.

 

I recognise his comments regarding the iFA. Now if the Company had e mailed us a fact sheet which stated their minimum charges, then of course we would have looked elsewhere, but they did not. Even the adviser made the comment that many people felt the charges were high and did things themselves. i am not surprised. Now, in slight defence of her poor offerings, she maybe felt that until we signed oin the dotted line, she was not really going to put much effort into it, however, I did expect a little more input. Even if she had shown us Quote A, B, C etc and then said which was the best option, then we would have had more to go on.

 

Now, we are realistic and did not expect massive sums of money. I have done enough digging to know where we would be, but I think the thing that bugs us the most was the 14 day deadline given by the pension provider starting from when they sent out the documents. Advising people to search the market is no use if you only have 5 days to do it in. I expected a minimum of 28 days but it seems that is no longer the case or Royal London are a bunch of scrooges. By the way, we did not pick them, it was done by an employer again many moons ago.

 

Again, during the first half of my working life Company Pension Schemes were all the rage and compulsory. They also offered a good deal although at the age of 35 it seemed an awful long way away. However, Gordon Brown scuttled Company Schemes and since then they have withered away. It is all fine and dandy to tell people the other options available but if you have no more working life left, it is not much use.

 

Anyway, the coffee will taste good

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I have all the sympathy and empathy in the world for the situation you outline.

 

Various governments have over the years tweaked things like pensions - but the last Labour one in particular did more to scupper the savings culture in the UK than any other government before it.

 

I truly wonder what the book of history will write about Gordon Brown given his stealth tax on funded pensions, his decimation of the Private Sector Final salary schemes and his truly incredible spending on useless regulation of the Banks.

 

Royal London as a provider is about number 99 on my list of 100 providers. Their admin is rubbish, fund choice limited, and charges high.

 

As for only giving you 14 days notice - I think the FSA's Treating Customers Fairly rules state that you should have been written to 3 months before the date outlining what your options are and telling you that you have an OMO and that you can seek independent advice etc etc.

 

If you did not get anything like that Dave I would wack off a letter of complaint because you are quite correct - giving you 14 days is not fair - and I believe that in doing so Royal London have broken the rules.

 

If you want a pro-forma letter to save you re-inventing the wheel - let me know your email address via a PM and I will send you a copy.

 

 

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Interesting article from citywire - behind a paywall so a cut and paste job which will delight some I am sure (lol)

 

............................

 

The government will be unable to persuade people to save more for their retirement if it persists with its policy of quantitative easing, which is wrecking the returns on savings, writes Jillian Thomas (pictured).

 

Sections of the public sector are either up in arms, in the middle of, or just starting industrial action over changes to their pensions. But what about employers that are managing growing deficits in final salary pensions schemes, and individuals saving in personal arrangements? They look at the public sector with envy or dismay over the action.

 

Chancellor George Osborne’s attempt to avoid a new economic crisis is hitherto untried in the UK. Quantitative easing (QE) involves a process whereby the UK government lends money to itself. This is possibly the biggest monetary experiment in British history. The acronym, QE, may have an anaesthetic effect on its hearers, but behind the soothing terminology lurks the frightening reality of a raid on pension funds.

 

Unfair on savers

 

Many will argue that although QE may be an evil, it is necessitated by the current financial emergency. Its roots, however, lie in governments not saving during the boom years and casino-style lending by banks, culminating in the 2008 banking crisis.

 

Is it right that the thrifty, those saving for their golden years, not in final salary schemes, are those who are paying more dearly for this emergency?

 

Mervyn King, governor of the Bank of England (BoE), made a £375 billion decision to create ‘magic money’ that has been lent to companies, crucially only to buy UK government debt, thereby radically reducing the cost of borrowing. These actions have failed to kick-start either growth in the economy or lending from the banks, but annuity rates have fallen by about a third during the corresponding period.

 

The knock-on effect is devastating, and the unfairness on those who are not in public sector pension schemes and those who have to assume their own annuity and investment risk is immense. Solvency II and unisex annuities will both soon cause further concerns.

 

The knock-on effects

 

In basic terms, QE has made the cost of gilts increase, with yields falling, creating the perfect storm for those who do not benefit from final salary pension schemes. Over the same period, many investors have experienced small or no investment growth owing to the high volatility on the world’s equity markets. This has been further exacerbated by BoE base rate being at 0.5%; deposits held in savings accounts since March 2009 have failed to keep up with inflation.

 

These issues are shown most clearly in the average annuitising pension value of £27,000: since 2008 the emerging income from this pot has decreased by £440 per year.

 

...........................................................

 

This is NOT good news at all.

 

I do not see the situation for Private Sector Pensions getting any better.

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CliveH - 2012-07-24 7:47 PM

 

I have all the sympathy and empathy in the world for the situation you outline.

 

Various governments have over the years tweaked things like pensions - but the last Labour one in particular did more to scupper the savings culture in the UK than any other government before it.

 

I truly wonder what the book of history will write about Gordon Brown given his stealth tax on funded pensions, his decimation of the Private Sector Final salary schemes and his truly incredible spending on useless regulation of the Banks.

 

Royal London as a provider is about number 99 on my list of 100 providers. Their admin is rubbish, fund choice limited, and charges high.

 

As for only giving you 14 days notice - I think the FSA's Treating Customers Fairly rules state that you should have been written to 3 months before the date outlining what your options are and telling you that you have an OMO and that you can seek independent advice etc etc.

 

If you did not get anything like that Dave I would wack off a letter of complaint because you are quite correct - giving you 14 days is not fair - and I believe that in doing so Royal London have broken the rules.

 

If you want a pro-forma letter to save you re-inventing the wheel - let me know your email address via a PM and I will send you a copy.

 

 

It was not as straightforward as that Clive.. My wife's retiral date arose while we were on holiday in Spain so we had written to them to state that, and also that we would contact on our return, which is what we did. We asked for an up to date quote with OMO options and this is what we received but......with the comment that the quotes were only valid for 14 days. Now I suspect that Royal London, bad though they may be, would not put in writing anything that did not meet legality. Plus, even after looking at what our so called IFA offered, the Royal London quote was higher, so what do you do? Shout about principles or take the cash and run? Again, I did not pick them but in some degree of fairness we did not pay any charges for the fund. So, in conclusion we are where we are, not the happiest bunnies in the burrow but have to take what we can get. Also looking at the news today all I can foresee is more QE, interest rates being cut and therefore annuities going even lower.

 

I am from the so called 'baby boomer' generation who evidently have had it all 'fingerlicking good' all our lives. Sorry, but not sure who they are including in that generality. We struggled to get work, did not get huge Grants to go to university, so worked every holiday. My university grant amounted to £50 per annum although I did get the fees paid, as did everybody. Paid mortgages that topped 15% and only dropped below 10% when we were near the end. Now we have savings rates at rock bottom and like many others have helped our kids to get on to the property ladder. And yet, we are supposed to be happy and pay even more.

 

 

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OK Dave - i see that things are as ever - not simple and straightforward. I suppose I get used to having a system that flaggs up clients 12 months, 6 months and 3 months before their SRA.

 

As a general point to everyone - please note that it is highly unusual that your pension FUND provider will offer the best Pension ANNUITY rate.

 

I would also mention again - sorry if it gets boring - that there are alternatives whereby you can still take an income but delay the day you convert your fund to an annuity until either the annuity rate is better because you are older and/or annuity rates simply improve because the economy gets better (one can but hope 8-) :-S )

 

 

 

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