Another one which BobE emailed in, from The Guardian:
The ONS figures, published in its Pensions Trends report, show that savers who want to achieve a larger retirement income have also seen big rises in the amount they need to have saved during their working life. To buy an inflation-linked retirement income of £25,000, less than the UK's average salary, now takes a pension fund of £763,900.
That is the figure given by the ONS (page 2), which we shall assume to be broadly correct.
For some strange reason, possibly EU related, the cost is now the same for men and women, even though women tend to live longer and so it should be more expensive for them. The result of this will be that men avoid buying an annuity and it's now a better deal for women, as a result of which the price will creep up a bit more and men will simply not buy annuities if at all possible.
To work out the annuity rate, all we need to know is average life expectancy at retirement, which is 21 for men and 27 for women = 24 years according to the ONS.
Bung "=PV(-0.0185,24,25000)" into a spreadsheet and you get a nice round present value of £764,000.
OK, that's index linked, which means the initial return will be lower than non-index linked, but I'm not sure how they justify paying out a negative return. If you were prepared to gamble on living exactly 24 years and inflation being 2% throughout, you could put the money under the mattress, not earning a penny in interest, spend £25,000 in the first year and increase the amount you spend every year by 2% to match inflation and you'd still end up with £4,000 left over to cover your funeral costs.
(I'm ignoring tax distortions in all of this).
Wednesday, 24 April 2013
Pensions annuities now pay out 2% per annum. To the annuity company.
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12 comments:
Pension fund are excellent players. Skimming.
What are pensions invested in?
What is the income they are receiving?
I'll leave that to you folks to figure
The point about annuities is to insure against outliving your savings. When annuities from retirement are this expensive, wouldn't it be cheaper to buy insurance for living past a certain age? Say 80+, which is relatively low probability, and more insurable, and you can schedule your own drawdown up until then.
Is this available in the market, delayed annuities?
The whole annuity 'market' is massively distorted by a series of gummint failures, both here and in the EU.
MW is correct, unisex annuity and life insurance rates have been made compulsory by the EU on the basis that gender rates are 'discriminatory. Stuoid of course, but what do you expect? Also annuity companies have been massive - compulsory - buyers of government debt, i.e. Gilts. IMHO this is just another way the gummint has been financing its profligacy stealthily at the expense of savers. Next IL gilts are a travesty of honesty. I seriously doubt that IL Gilts Index rate is honest at all, since it is calculated by the borrower. LIBOR may have been abused, but this is just corrupt. Next regulatory costs on FS generally are between 20% and 30% of revenue, hence of that 2% 'profit' 0.6% goes straight out as Regulatory Tax. And, financial repression drives everyone into speculation to try and increase income. So the sales of annuity alternatives or different takes on annuities (short term for example) are booming.
I blame the gummint.
RS, Lola explains the nitty gritty. There's no "figuring" to be done.
L, ta for background info, although I think the idea of tricking dumb people into funding the national debt on the cheap by offering them illusory tax breaks is quite neat. The tax breaks are of course illusory, because all it means is that the tax rate on the rest of your income is that much higher.
Kj, that's a good idea, maybe Lola knows more?
MW/KJ You used to be able to buy 'deferred annuities', and this is what old fashioned s226 policies were - the official name was 'Self Employed Retirement Annuity'. They usually contained an insurance element since they were funded into with profit funds, and many had guaranteed annuity rates. (That was all screwed up by that paragon of virtue, not, Equitable Life). Nowadays various providers are trying to tackle this annuity problem by offering all sorts of schemes, many of which are fixed term annuities with a guaranteed future value. I think it also drives the sale of 'structured products' which can be used within drawdown pensions to get a known rate of return - probably. (I am not a fan of structured products). There are also immediate needs annuities (currently only two providers) with yields of about 30%-ish and depending on various factors that can be bought if you are nearly dead. And if you are taking a long time to die you can buy impaired life annuities. (For example MW is I think a smoker, he would qualify for an enhanced annuity rate). But, whilst we have epic Fabian Socialist mis-regulation and are in the EU and have financial repression there's not much else. Generally if you have £750,000 in pension funds we would try and tell you not to buy an annuity but to do the drawdown option - as cheaply as possible - strip out the tax free cash and the maximum income. But when you die the tax charges can be eye watering. Basically if you put all your long term savings out of your own income into a funded pension you are bonkers, because the buggers - insurers and gummint - will have more than their fair share.
Nice to see this post from someone I associate with more usually bashing the elderly because we own all the country's assets - having bought all the houses cheap - and are thus stopping youngsters from getting a decent lifestyle.
For those of us without civil service or guaranteed pensions life is not the bed of roses it could be!
One other point, pre-funding your 'pension' was what endowment policies were originally for. The clue is in the name. You could buy a full endowment which would give you a guaranteed sum at a future date and have a death benefit in the meantime. Personally I think that these were screwed up by offering tax relief on premiums to create the Self Employed Retirement Annuities mentioned above.
L, as ever, ta for all the background info and tips. I'm steering well clear, thank you very much.
W42, when have I ever partiularly "bashed the elderly"?
Fact is, I am busy bashing the rent seekers, which includes politicians, quangocrats, financial services, landowners and NIMBYs.
And fact is, the elderly are always front of the queue asking for handouts, and having snapped up houses which used to be cheap because of Domestic Rates, Schedule A tax, lots of council housing and lots of new construction, they have deliberately pulled up the ladder behind themselves.
Today's pensioners cheered to the rafters when Schedule A went, they kept voting for the government which got rid of Domestic Rates and are as NIMBY as anybody else.
If you add the trebling in house prices to the increases in taxes on the earnings on actual younger people and workers, then it is quite clear that they HAVE been complicit in denying youngsters a "decent lifestyle".
MW What's really worrying is that my peer group largely don't think this stuff through. They are as conditioned as everyone else that 'buying a pension is a Good Idea'. When you look at it, and work out that the tax breaks are either (a) illusory or (b) swallowed up by the scheme operators you wouldn't get involved at all.
Now, we can do you a 'pension' at the same price as we can do you an ISA, but, even then you need >£100,000 ish to keep the costs down. (It's the way the discounts work). So you get the full benefit of the initial tax relief which is at your highest marginal rate. But you'll still have to navigate the 'annuity problem' at NRA.
http://www.ftadviser.com/2013/04/24/opinion/tony-hazell/eye-watering-annuities-profits-demand-fca-attention-uL4XeHhxlUPXSpMBEjTeNO/article.html
L, from that article...
"Last month the Daily Telegraph published an intriguing story claiming that the profits margin on annuities was around 20 per cent.
This was based on Standard Life after it disclosed its profit margin was 18.9 per cent. This, Standard Life said, was a reflection of the level of risk borne by the firm in providing them.
No other insurer would reveal its figures, which makes me suspect that margins are indeed eye-wateringly high.
Of course this is sustainable because of the opacity of the product. Purchasers do not receive a breakdown of the cost of supplying the product and the profit margin. Many would argue they should not.
But the firms appear to have plenty of money to pay commissions to middle men who sell annuities on a non-advised basis."
I thought as much.
"But the firms appear to have plenty of money to pay commissions to middle men who sell annuities on a non-advised basis.". Just for the record 'middlemen' (like us) get between 1% and 2% depending on provider for sorting out a pension annuity. And most pension pots are modest - £30,000 ish being the average. And when I tell you that just the regulatory paperwork is about 130 pages let alone all the work that has to be done to sort out the best deal and deal with all the crap provider admin, on average it ain't enough. Clearly for a £750K pot it would be, but not for the average. And if independent thoughtful blokes like us don't do it the poor bloody client gets lumbered with a bank or an insurer or whatever.
Generally, Hazel is a twat journo doing sensationalising.
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