[Closed] Understanding Pensions and Annuities

But you might live to 100. This has to be taken into account, and paid for.

Also, average life expectancy might be 80, but the average for the cohort that made it to 65 (which presumably includes you) has a higher expectancy. Which as above, needs paying for with lower annuity rates in this case.

Have I got my sums wrong or is the pension industry really this unfair?

No
Yes
This is why do few people do annuities any more. Like most of life, it's something that exists mainly to benefit the generation before yours ....

Thanks - I though one of the points of annuities was to release funds in a tax efficient way.

Are there any good sites for pension advice? - most seem to want me to sign my funds over to them so they can take a sizeable chunk in exchange for a funky name.

The life expectancy for a 65 year old male is another 20 years
https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies

Was your annuity index linked? That will change the calculation in your favour.

Having said that, annuities haven't been generous for a long time now. Drawdown is worth looking into.

moneysavingexpert is often good for finance.

https://www.moneysavingexpert.com/pensions/

Donald,

Thanks for highlighting the increased life expectancy - the age of 80 I used for my calculation was for 2017-2019 and this seems to be increasing.

jonba - thanks I will check that out.

I do wonder whether pensions are worth bothering with - my dad died at 61 and mum at 67 - I cannot see myself realistically retiring before 65 so may not get to spend much of anything I do squirrel away. Coke and hookers looking like a better option!

I do wonder whether pensions are worth bothering with – my dad died at 61 and mum at 67 – I cannot see myself realistically retiring before 65 so may not get to spend much of anything I do squirrel away. Coke and hookers looking like a better option!

Or you may end up living for a couple of decades past your 65th birthday, personally I'd rather not do it in poverty or have no choice but to continue working.

If you're lucky you'll have a good few years spending your pension money, if you're unlucky it doesn't matter, as you wont know about it anyway 😀

Thanks for highlighting the increased life expectancy – the age of 80 I used for my calculation was for 2017-2019 and this seems to be increasing.

It isn’t that it’s increased since 2017. It’s that the most likely age for everyone was 80 when they were born, but that includes all those who died young.

The average for those who’ve lived to 65 is higher, more like 85, because it’s an average for a smaller group of the starting population *all of whom* got to at least 80!

By the time you get to 65 and ask the question, the answer has changed. Saying “years left” (above) is a good way to phrase it.

Put 25% of everything you earn out of reach of yourself from a young age.

Make sure it's earning at least 5% compound.

Retire early, and rich.

Starting those thoughts myself. Currently 51. Got a couple of pensions I can take with no penalties at 60 apparently worth £10k a year, do I'm thinking partial retirement then and keep going 3-4 days a week till 65.

Current forecasts for all my pensions total around £23k a year income, which I could live on now, but the two big ones I can't get till I'm 67, and £23k may not be much in another 30-40 years.

FYI, free advice for those over 50 and general pensions info.

https://www.pensionwise.gov.uk/en?gclid=Cj0KCQiA48j9BRC-ARIsAMQu3WRIC3ZDBHkJh3bB8sXx5LexeIPxMD0opF7xhdY7kEqO1FGFrGr86y8aAjsAEALw_wcB

I used it and the bloke I got knew his stuff.

Put 25% of everything you earn out of reach of yourself from a young age.

Fine in theory, probably impossible to do for most folk

Put 25% of everything you earn out of reach of yourself from a young age.

Fine in theory, probably impossible to do for most folk

Especially if you want to buy a house. And buying a house may well be a much better investment than a pension fund.

My dad retired 20years ago I retire in 10. His current pension is bigger than my projected pension. I thought public sector was the land of milk and honey.

Starting those thoughts myself. Currently 51. Got a couple of pensions I can take with no penalties at 60 apparently worth £10k a year, do I’m thinking partial retirement then and keep going 3-4 days a week till 65.

Current forecasts for all my pensions total around £23k a year income, which I could live on now, but the two big ones I can’t get till I’m 67, and £23k may not be much in another 30-40 years.

Remember any pension paid is income, therefore taxed. So if you take the £10k it uses up your allowance and then any monies earned through working will be fully taxed.

You'd expect the £23k to be indexed, so work on it's 'equivalent' to £23k. Add in your State Pension and you're passed £32k. And if you didn't take the two at 60, will they continue to appreciate? If not, take them.

Annuity rates (how much your money gives you as income) are affected by bind rates, and with low interest rates now and for the foreseeable future, they are low.

Pension annuity rates are much lower than they used to be. The government pension freedoms recently allowed you to drawdown the pot yourself instead. Keep it invested and withdraw income from it every year. When its gone its gone.

Personally I won't touch an annuity with a barge pole, but Ive been self managing my work pension pot for over 10 years and am comfortable with it.

I’m just going through the pension decisions/calculations now. I am 56 and have decided to take voluntary redundancy at the end of this year. I can draw my defined benefits pensions or I can cash them in. Waiting on financial advisor to come back to me.

I’ve done the monthly outgoings spreadsheet on the money saving expert site to see what I need to keep me afloat. Living in the Uk is expensive.

IANAFA

* Pensions are a great thing particularly if you are in the 40% tax bracket.

* Many underperform however if your employer contributes then this is free money, plus you get the tax benefits. They would have to perform spectacularly badly for you not to make money.

* Always pay what you have to in order to get the maximum from your employer.

* Start 10 years ago

* If you can, open a SIPP and choose your own investments taking advantage of the tax benefits

* You will know best but I estimate the first few years of my retirement (around 4yrs from now) will be very active (that doesnt mean expensive) traveling, spending months away from home etc however nature forces us all to slow down so I am planning my spending accordingly and by the time I reach 75 I expect our living costs to have reduced significantly

* Annuities are rubbish and my projections are based on a number of pensions that will give me a fixed income plus a SIPP and some ISA. The 4% rule is interesting and I am basing much of my projections on this.

Living in the Uk is expensive.

Which is why your salary is so high 🙂

Very timely thread, I'm currently looking at this as we're very much in a 'transition' phase of our life.

I'm self employed and my gf works in hospitality so doesn't seem to have a work based pension.

I've done some research and had a chat with a few friends that are fairly clued up. A SIPP seems to be a good investment for us.

The whole annuity thing has been putting me off though. So if I don't want an annuity, what other options are there to access the money in a tax efficient way?

EDIT medium term plan is to get a buy to let as well as a SIPP...we're going to hopefully be mortgage free next year. So plan on putting some away in the SIPP, some towards a BTL deposit. We generally have a 'modest' rainy day fund that is instant access.

my gf works in hospitality so doesn’t seem to have a work based pension.

If she's an actual employee, there must be a pension scheme, it's now the law.

medium term plan is to get a buy to let as well as a SIPP…

When you sell your BTL, you'll pay Capital Gains Tax on it

* Many underperform however if your employer contributes then this is free money, plus you get the tax benefits. They would have to perform spectacularly badly for you not to make money.

They perform as well as any other pension, they're invested in the same markets. It's all down to the investments chosen, and most occupation schemes offer pretty much full market choice

* Always pay what you have to in order to get the maximum from your employer.

Absolutely. It is free money, I really struggle with why people don't get this.

You will know best but I estimate the first few years of my retirement (around 4yrs from now) will be very active (that doesnt mean expensive) traveling, spending months away from home etc however nature forces us all to slow down so I am planning my spending accordingly and by the time I reach 75 I expect our living costs to have reduced significantly

Yep, you can think of retirement as having three stages:

Go-go: just retired, wanting to do all the things you said you'd do when you retired, like travle and buying motorhomes and wotnot. The expensive phase

Go-slow: getting on a bit, not doing quite as much, costs fall

No-go: old giffer spending most of your time doing the crossword and watching Homes Under The Hammer. Costs very low (excluding care costs)

If you can, open a SIPP and choose your own investments taking advantage of the tax benefits

There's (very probably) no point doing this if you have an occupational scheme. You'll (very probably) be able to choose the same investments from within your occupational scheme, and possibly with a lower management fee

Tax efficiency of pensions is mainly about tax relief on the way in. You can put in money from salary before it’s taxed.

If you pay higher rate tax, £60 of your take home pay puts £100 into your pension pot.

Ignore talk of annual allowances & lifetime allowances unless you are looking at saving over a million.

When taking your pension, you can take 25% of the pension pot as tax free cash, and the rest is effectively income, so taxed the same as your salary would be.

Tax wise there is no difference between an annuity & drawdown.

Drawdown is where you keep all of your pot invested instead of buying an annuity, then taking an income from it.

That’s basically what a pension company does for an annuity on your behalf anyway, but charges a small fortune.

Have a Google of “how drawdown works” and there are lots of good calculators online. Try which or Quiik

. I can draw my defined benefits pensions or I can cash them in

It's not been said so far and this is important.

If you have a defined benefit pension then there are virtually *no* circumstances where you would be better off taking the cash value instead.

The ones I can think of are

1) you have a terminal illness

2) the defined benefit is so small it doesn't really factor into your retirement planning

When you sell your BTL, you’ll pay Capital Gains Tax on it

And the government is apparently hovering over CGT to start to recover the costs of Covid support. I'd also say that legislative changes, tax changes and general costs have pushed a lot of more casual BTL landlords out the market in the last few years. It's not the safe haven it was 10-20 years ago.

Drawdown is where you keep all of your pot invested instead of buying an annuity, then taking an income from it.

That’s basically what a pension company does for an annuity on your behalf anyway, but charges a small fortune.

If you do it yourself, you have to take on the risk of managing the investments and income levels to make sure you can keep the level of income you need for the rest of your life. The annuities companies charge what they do because they're taking on that risk (and it's a significant one, as who knows what will happen that will affect investment returns over the next 20 years?).

Annuities have their place, as although the income returns are not huge, it is guaranteed. As ever, it all depends on personal circumstance, ability/knowledge/willingness around self-managed investments and attitude to risk.

It’s not been said so far and this is important.

If you have a defined benefit pension then there are virtually *no* circumstances where you would be better off taking the cash value instead.

Ab-so-effing-lutely

EDIT - *sweeping generalisation alert* the cash values offered to come out of defined benefits pensions are often what they are because, honestly, the schemes would like you to leave. Again, this is because they are holding all of the risk of managing their investments to be able to provide the guaranteed incomes to the scheme members, and that's expensive. They'd rather not, they'd rather you took on the risk.

This is where knowing your termination date would be really handy. If I plug my age in the ONS app, this is what I get:

[url= https://live.staticflickr.com/65535/50349731051_cfa07e3f3f.jp g" target="_blank">https://live.staticflickr.com/65535/50349731051_cfa07e3f3f.jp g"/> [/img][/url][url= https://flic.kr/p/2jHewTe ]Life[/url] by [url= https://www.flickr.com/photos/brf/ ]Ben Freeman[/url], on Flickr

My life expectancy is 84, but I could still live to 100; so you have to plan for that eventuality (or have some fail safe suicide plan in place).

A final salary / annuity take all the risk away from you and just keep on paying out till you pop your clogs, be that 1 year or 50 years later...

Ignore talk of annual allowances & lifetime allowances unless you are looking at saving over a million

Article in this week's Sunday Times about this, if you pay into a pension from 20 at a modest percentage and get modest growth, it's not that hard to hit the £1m lifetime allowance before you retire (apparently).

https://www.thetimes.co.uk/article/dreaming-of-a-rich-retirement-1m-may-not-be-enough-tv3jxk3s5

Footflaps - that is correct, but remember the LTA increases each year with inflation. For most people its an irrelevance. For those affected its a nice problem to have!!

but remember the LTA increases each year with inflation.

Well in theory, but relies on the Chancellor deciding to up it each year, which may not happen....

Well, anything is open to a policy change. Curent policy is LTA increases in line with inflation, which it has in recent years. Its currently £1,073,100. By my intended retirement in 2035 it is projected to be £1.7m.

Inflation renders comparison of a million pounds aged 20 to a million at retirement rather pointless.

Inflation renders comparison of a million pounds aged 20 to a million at retirement rather pointless.

Its not just inflation that renders it pointless for most of us 🙁

Curent policy is LTA increases in line with inflation, which it has in recent years.

Probably worth noting that since the LTA was introduced in 2006 at £1.5M it’s been as high as £1.8M before dropping to £1M and then increasing with inflation. Current policy is no guide to future policy; pension pots will continue to be easy pickings for governments that are short of money (until they’re all empty!).

Current policy is no guide to future policy;

Yes, I'm hoping the 25% tax free lasts another 5 years, so I can take advantage of it before it goes.....

People are generally really bad at determining their risk. Which doesn't help when trying to work out so many unknowns or uncertain futures.

Personally, if I didn't own-outright a home, I wouldn't be particularly happy with a drawdown. The possibility - however remote - of becoming homeless at any stage of life nevermind in old age, because of something probably completely out of your control is something I would pay the price of annuity for its security. It's been said above, but when doing the calcs you need to know whether the expected income given are index-linked (i.e. equivalent income linked to inflation) and what penalties there are for drawing early etc. In almost all cases, it is far better not to draw a pension early if you can afford it. I guess the main question you need to determine is how much do you need as an absolute minimum (in today's prices) to live and are you willing and able to reduce your spending to nothing if it comes to pass that you have no money left / you live too long / you have a life-event that causes you to spend more than you planned / the stock market crashes in 40 years time or inflation rates hit 10% and you have moved your drawdown into cash and bonds.

Pensions are mental, I know there was a huge argument over them a few years ago, but the fall out in a few years is going to be crazy.

For example, from 2001 to 2009 I worked in one of the big banks, my salary wasn't great when I started, but it was okay by the end of it. It came with the gold standard of generous pensions though, haven't a clue what it cost, it was 'free'.

I didn't have a pension when until we went into Auto Enrolment in 2017, I'm due to retire in 2044 at 65 after 27 years of pension payments.

The Bank pension I was only part of for 8 years and effectively cost me nothing (with the obvious caveat that someone paid it) will pay me roughly double what 27 years of NEST contributions will pay.

At the moment, I don't think I'll actually be able to retire at 65, my private pensions won't be enough, so I'll have to keep on until 68 when my state pension kicks in, but even that's in the air because my pension age is under review, it might rise until 69, if it exists at all.

There’s (very probably) no point doing this if you have an occupational scheme. You’ll (very probably) be able to choose the same investments from within your occupational scheme, and possibly with a lower management fee

I've never seen anything like the flexibility in a company pension as a SIPP. My current one offers around 6 funds....

The LTA doesn't actually get you that much either. If I manage to hit it, I can only expect to draw down (3.5%) at about 10k less than my dads final salary pension (scientist in the civil service).

The Bank pension I was only part of for 8 years and effectively cost me nothing (with the obvious caveat that someone paid it) will pay me roughly double what 27 years of NEST contributions will pay.

This is one of the problems with auto-enrollment; people don't have a choice whether or not to pay into a pension, they have to (which is a good thing), but with that comes the assumption that, if they pay what they're told they have to pay, that is enough and it's not, it's the absolute bare minimum.

The old adage still pretty much holds true; halve your age that you start paying in, and that's the percentage of your gross income that you should be saving into your pension

I’ve never seen anything like the flexibility in a company pension as a SIPP. My current one offers around 6 funds….

They often have a 'standard', limited, range of funds (pretty much aligned to levels of risk), but very often they allow access to pretty much anything if you contact the provider. Not always, but often.

For example, from 2001 to 2009 I worked in one of the big banks, my salary wasn’t great when I started, but it was okay by the end of it. It came with the gold standard of generous pensions though, haven’t a clue what it cost, it was ‘free’.

I paid into a final salary scheme for 7 years in the 90s, my total contributions were approx. £7k (5% of salary). Three years ago I cashed it out after 14 years in limbo in the Pension Protection Fund, having lost 10% and all index linking. Walked away with £200k (and another £15k to come next year apparently). Equivalent to something like 17% annual growth. If it hadn't gone bust, it would be worth evern more.

Current indexed pension costs are c 2.2k per 100k, it must be the indexing that is expensive otherwise the 50 year payback would make it unattractive.

Btl does work but not really for new investments, it can if you are a bit speculative but at c 3.5% on new investments it's not the deal it once was. C 15 years ago it was 6% plus generous allowances.

For me it's a mixed bag, I have some db stuff that keeps getting nice uplifts as it's old and linked to rpi. We were told when working the cost of this pension provision was 40% of gross pay, hence the scheme closure.

What worries me is I have tenants in their 40s who are higher rate tax payers but still cannot buy their own homes, sw London prices.

I do agree appetite to risk is very personal and circumstance dependant.

My work scheme is managed by Aviva. I can either use the scheme wrapper with Lifestyle funds and a choice of 20ish funds, or use the Aviva SIPP with unlimited fund choice as well as shares and property.

The company schemes with limited choice are designed to be cheap and simple for those who don't want to actively manage it.

My platform annual charge is 0.14% and my choice of funds vary from 0.14% for my US & Emerging Markets trackers, to 1% for my managed Legg Mason Japanese Equities fund ( volatile but staggering returns - 220% over 5 years and 45% above pre Covid levels!)

Poolman what are the figures that you're quoting in relation to btl?

Also, I'd imagine that given you're in London and I'm in the North West (just) that btl figures aren't going to be remotely comparable.

The Bank pension I was only part of for 8 years and effectively cost me nothing (with the obvious caveat that someone paid it) will pay me roughly double what 27 years of NEST contributions will pay.

I've a load of pensions, both DB and DC, and a particularly DB from the mid 80's.
There for 3 years, earned £14k pa when I left and the pension is currently on £6k pa (indexed) 🙂

I’ve a load of pensions, both DB and DC, and a particularly DB from the mid 80’s.
There for 3 years, earned £14k pa when I left and the pension is currently on £6k pa (indexed)

Jesus, took £200k of defined contribution to get my fund to that. Probably 150k of contributions.

(and that's not index linked, just draw down!)

Btl in sw London for new investment is c 3.5%, that's 300k for a 1 bedder rented at 1000 pcm. I have had mine 10 years plus so the buy in prices much lower.

I am looking at northern areas, 2/3 bed house at c 200k, rent c 700 pcm, no service charges so c 4%. Its a future holiday home for me but following the local forums there is a good demand for rental. I 'm happy to wait for the right house but have a few options I have looked at,

Most of my pension pot investments are ticking by at 5%, btl, shares, db pensions, you still need 500k to achieve 25k. Tbh I don't really measure it any more as btl are lumpy assets, you can't really sell one if it has a bad year as the reentry costs are huge.

to 1% for my managed Legg Mason Japanese Equities fund ( volatile but staggering returns – 220% over 5 years and 45% above pre Covid levels!)

Might have to look at that one, I've got a load in Japanese funds, not doing that well.

My best investment is SMT, up something like 300% in 5 years.

So you're talking about ROI per annum then yeah?

We'd be looking at something around 100k...25k deposit then an interest only mortgage....we'd easily get £500 per month rental....overpay the mortgage and save the surplus. We're hoping to have that all in place by them time that I'm 40, by the time I'm 55 (in 21 years time) I'd hope that between that and the SIPP that we're planning, there'd be a reasonable amount to give us some options.

We already 'own' the pensioner must have that is a motorhome too

Yes 500 pcm on a 100k house is doable, those terraces in Lancaster near the hospital do that, if you can self manage you have no real costs. Yields soften the better quality you go.

Stay diversified though, you never know whats going to happen.

Yeah that's the plan. I grew up in Stoke-on-Trent, so know the area well. Plentiful cheap property and the rental market is fairly strong. TBF 100k would get you something that probably yield £550 pcm in Stoke. I'll probably target something that I can add value to...I can do some of the work myself and am local enough still to know reliable local tradesfolk. Would probably self manage too.

Jesus, took £200k of defined contribution to get my fund to that.

Yep, I've those too...

Something pension related I am finding out about the hard way this year is the annual allowance. Worth checking the calculator if you've been maxing out your contributions for a few years: https://www.gov.uk/guidance/check-if-you-have-unused-annual-allowances-on-your-pension-savings

Something pension related I am finding out about the hard way this year is the annual allowance.

Pretty much the opposite problem to most! “Oh no - I’ve put too much in my pension without really noticing. What shall I do?!?”

What shall I do?!?”

In my defence the rules are a bit opaque for defined benefit schemes unless you really look.

In a DB scheme, what counts towards your annual allowance is not the amount you pay in, but the increase in the annual value of your pension, [b]multiplied by 16[/b]. So if - for example - you get a decent promotion, you can exceed the allowance for a year without paying in any extra. Combine that with inflationary increases on a decent size pot and some additional contributions and it turns out you can exceed your allowance for several years without earning much more than the annual allowance value itself...

Bookmarked for when I have time to read through properly!

If you have a defined benefit pension then there are virtually *no* circumstances where you would be better off taking the cash value instead.

Absolutely not true.
There are plenty good reasons to transfer out of a DB.

Ask me how I know lol. Best move I've made so far.

It’s not been said so far and this is important.

If you have a defined benefit pension then there are virtually *no* circumstances where you would be better off taking the cash value instead.

Not true at all. You certainly need to be very wary and do a lot of research, but we've certainly no regrets. And given that significant numbers of pretty senior (and knowledgeable) people who work in the pensions industry have done it, well......

However I would say that for probably a large majority it's not the right thing to do. You need to be very sure your money is then properly invested and have an advisor you have absolute trust in.

I don't use an advisor, some companies are well set up to do without them and their fees for doing nothing.