BIG NEWS: It will no longer be compulsory to buy an annuity when coming out of a DC scheme from 2015 April i.e. ultimate freedom for pensioners Subject to full (marginal) income tax rates on 75% of the pension fund a DC pensioner can now withdraw all their pension. 25% is tax free. There will also be flexibility to draw down the pension more slowly throughout your pension life to limit tax. Wow! Lots of repercussions for life insurance companies and the actuarial profession. The IFoA president is saying it should be extended to DB too. I don't know if its in the best interests of the actuarial profession. On the other hand there is an opportunity for actuaries to design innovative products with lots of options and guarantees embedded in them particularly for point 2 or if it were to extend to DB. So it could mean more jobs for actuaries! Comments from any pension actuary people... http://www.telegraph.co.uk/finance/personalfinance/pensions/10710606/Budget-2014-How-will-the-new-pensions-system-work.html
I've replied on JayDee's thread here: http://www.acted.co.uk/forums/showthread.php?p=34552 just to keep discussion in one place.
This is a further & perhaps critical blow to the Actuarial Profession. Firstly Defined Benefit pensions disappear. Then with-profit products. Now annuities. What's left for Actuaries to do? The risk is transferred to the customer and their IFAs, who are rejecting the 'expertise' of actuaries to calculate bonuses, benefits and annuity rates. I really can't blame people, when commutation factors like 25 are being applied to pension pots. Have Actuaries been 'fair' or simply acting as a 'respectable' face overseeing rip-offs for the benefit of insurance companies? The plummeting of share prices demonstrate the 'value' the rip-off annuity rates were for the insurance companies. No wonder the Chief Executive of the Profession is busily recruiting members abroad.
Since when do folks on the IFoA payroll care about the interests of its members? Judge their actions, not their spin.
Annuities are not going away and minor things like the life and health sector aren't exactly vanishing. Annuity rates might be fairly rubbish but unless you're going to magically increase interest rates and reduce life expectancy I don't really see how you propose to cure that.
People don't really believe the life expectancy figures used by Actuaries apply to them. They see the lump sum given to insurance companies and the annuity received in return as a very poor investment when they could put this into a buy to let or just invest themselves in other ways and keep the remainder of lump sum to their family when they die.
You get a much better rate on property and other investments obviously because you are taking the risk yourself. If a large proportion of pensioners start using their pots to buy buy-to-lets, then rents will fall and it's not all clear that at that stage the rent received would be higher than the equivalent annuity payment (especially after any management fees, maintenance, insurance, etc). An annuity is still an essential product for those people who want to transfer the risk to someone else and get a guaranteed income without having to manage a property or an investment portfolio for the following 30 years. Whether you agree with the profit that insurers take or not is another matter, but this is likely to drop over the next year or two anyway after the FCA forces insurers to point out the best market price for each customer.
You may not believe in death, but death certainly believes in you. Annuity rates are rubbish, but they are also right. There is no other route that gives a payment stream without longecity or investment risk. None.
Didn't we get a buy-to-let boom a few years ago? I only remember rents going up. It's not a great sell when people realise it takes 25 years to get their lump sum back, or if they die sooner they won't get it back.
Right? Not necessarily for the individual. Say you're 65 and both your parents and grandparents died at 75. Then the insurance company tells you you're expected to live for 25 years. Who would you believe?
The recent buy to let boom only started happening after help to buy started in April 2013, it's too early to see how that's affecting rental prices but I do expect them to either trend down or trend up slower than usual, unless suddenly lots more people start renting. Or did you mean an earlier boom? It doesn't take that long. The best rate available for a £100k pot for a flat annuity with a 5 year guarantee is over £6k annually. You'd get your money back in 16.5 years. If you want to make that a joint life then it goes up to about 18 or 19 years.
I'm talking about the BTL boom in the 2000's. That's not great. Buy a property with £100k and you'll get £6k/year rent and when you die the house goes to your kids.
But you take on the risk of rents dropping, the risk of not having anyone rent your property for a few months and so no income, the risk of renters defaulting, the risk of repairs, the costs of insurance, etc, etc. I'm not saying you won't get a better return by doing buy to let, you probably will. But I'm just pointing out that this extra return comes from taking on more hassle and more risk, and for lots of people this is not a risk and hassle that's worth taking and they are better placed in an annuity.
Also, what are you going to buy? Most people don't even have pension pots of £100k, and £100k barely buys you a 1-bedroom flat in most cities these days, especially down south. That's probably pretty tough to get the £600-£700 a month in rent you'd need to match the annuity rate after costs of insurance, etc.
Yes more hassle than getting a cheque in every month but then again you can't put your kids or grandkids to live inside an annuity either and the risk of the insurance company walking away with your lump sum when you die just doesn't make sense to people nowadays. Maybe when people lived only 5 years after retirement it didn't matter.
That's why people should take a guarantee period with their annuity rate. A 10 year guarantee period costs very little, usually drops an annuity value by about 1% or less, and yet if you die at any point in the first 10 years your family gets a payout. Some companies (such as Principal Life in America) now also have a "return of premium" guarantee, meaning if you die before you've received your initial premium back then your family get the rest back as a lump sum, maybe these sorts of guarantees will work their way into our market too.
OK but then you die in your 11th year and your family doesn't get 14 years worth of annuity. Whereas if you owned a property you rented out your family would inherit a home bought 11 years ago that's kept pace with house price inflation...
Assuming you can buy a home for the £40k/£60k/£80k that you have in your pot, which you probably can't.
That's right. My understanding is that a Daily Mail campaign has helped lead to small pension pots of say £35k can be taken all as cash. Seriously, divide £40/60/80k by 25 and it's not a great income in retirement.
Pots of all sizes can be taken as cash, but you still have to pay tax. And as I've said, it's not 25, it's 16-20 depending on what options you take. So even if you had £500k, if you buy an annuity you would get maybe £20-£30k a year. If you instead take it all out (and pay 50% tax on it), you end up with £250k to buy your house to rent. It's almost impossible to buy something with £250k that will give you a rental yield of 10% after costs. Generally, people with small pots don't have enough to buy a property, and people with big pots will pay too much tax to make it worthwhile. Therefore I expect that in future (unless tax rules change), people with very small pots will take it out as cash, people with medium sized pots will buy annuities and people with large pots will go into drawdown.
But that's what they're changing isn't it: the tax rate won't be 50%. I'm not so sure. Still a poor deal no matter the size of the pot. If you take it all out yourself and invest it elsewhere, even in a savings account, maybe slightly less than annuity but you get to keep all the capital.
