Tag Archives: annuity

What can you do with small annuities?

If you have less than £5,000 in your pension pot then I believe you should be able to take it as cash. The fact is that annuities cannot really be bought with less than around £3,000 and those under £5,000 are not common. Anybody trying to shop around for an annuity after exercising the Open Market Option will already know that choices are limited. 

In 2007, the Association of British Insurers (ABI) reports that there were around 102,000 annuities sold with a value of less than £5,000.  That’s a lot of people being forced into very small annuities. Just to demonstrate the futility of this, a pension pot of £2,000 could earn you around £10 per month. What on earth are you going to do with that? Far better to take the £2,000 cash and do something useful with it.

I have mixed feelings about compulsory annuities anyway. Why should we be forced to take an annuity just because we reach the age of 75? What if your life expectancy is 5 years? Or even 1 year? I know you can get much more from an enhanced annuity that takes your health into account but surely you’d be better off with just the cash. And what about those of us who are reasonable financially sophisticated and would prefer to be in charge of our own finances – can we not choose for ourselves?

On the other hand, just like putting fluoride in the water supply, you manage to ensure the general welfare of the greatest number of people. You also remove the possibility of certain foolish actions – if I get my pension pot and bet it on a horse that loses I could end up relying on a state pension. The fact that the majority of your pension has to be paid to you monthly over a long period of time also pretty much precludes you going out and blowing it all on a gin palace pleasure boat (substitute your own favourite toy). You could argue that this prevents moral hazard e.g. I spend all my cash on fast cars, boats etc then rely upon the state to pay for my long term care.

I freely admit that I don’t know the answer. I hate being told what to do by a nanny state but I don’t want vulnerable members of our society blowing their hard earned pensions. I am certain though that people with smaller pensions pots (under £5,000) should simply be allowed to cash it in. There is no moral hazard here and no real impact on monthly income.

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Inflation to cut pensioner spending power by 65%

An Ernst & Young report commissioned by MetLife revealed that inflation of just 4.4% would erode pensioners’ spending power by as much as 65% over the next 25 years.  Pensioners are also being hit hard because such a large proportion of their income goes on food and fuel – both of which have increased at far more than the current overall inflation level.

A significant part of the problem is that many pensioners’ incomes are fixed.  A level annuity is one which pays out the same amount for the duration of the product – it stays the same even though the value of this fixed amount is constantly eroded by inflation.  Research from Standard Life warns that those with a pension pot of £80,000 buying a level annuity, will spend their whole monthly income on basic living costs, such as food and fuel within 20 years of retirement.

When you are about to retire and your pension provider sends you the documentation regarding your retirement options chances are you will receive details of a level annuity.  Not only that but it will probably not take account of whether or not you have a partner, quoting single life rather than the joint life you would prefer. This is pretty much the default and for many it is a poor option.

There are other options:

1. An index-linked annuity is tied to the rate of inflation

2. An escalating annuity rises at a fixed rate each year, regardless of inflation.  Some years the rise may be greater than inflation, some years it may be less.

3. You can even link your income to the ups and downs of investments although this can obviously carry more risk.

4. Level annuity – all of the other options are likely to offer a lower starting income than the equivalent level annuity so some people will opt for this if, for example, they do not expect to live long enough for inflation to matter that much to them.

5. An enhanced annuity is available for those in ill health – this can be significantly more than the standard annuity. According to MGM Advantage around 40% of people could be eligible for an enhanced annuity.

6. A mixture of different annuities.

So, whether your interest is in getting more money from your annuity because you are in poor health, passing your annuity income on to your partner should you die, or protecting your income from inflation make sure you investigate all of the options.  Whatever you do, don’t just accept what your provider offers you as you approach retirement – investigate it yourself or seek professional advice.

Are annuity rates about to fall…forever?

There are rumblings in the press about a possible downturn in annuity rates.  They’ve been on the up for some years so it wouldn’t be a surprise if they dropped now – nothing goes up forever.  The real question for me is will they ever come back up again? Life expectancy is rising and annuities pay out until you die – how can it last?

Many people that I have spoken to about their impending retirement have indicated that annuities are very unattractive to them anyway.  Perhaps it’s time to pay more attention to the alternatives.

Pensions transfers can be delayed by years

Suffolk Life have revealed that the average time taken for a simple transfer of money from one self invested personal pension (SIPP) provider to another is 36 weeks.  They add that the quickest transfer into their SIPP product was 30 days and the longest took two-and-a-half years!  

Imagine you want to invest in something via your pension but have to wait for the transfer to take place first – will you want to make the same investment decision 36 weeks, or years later?  Investment decisions should not be ruined due to maladministration.  

SIPPs can contain complex investments that may not be as liquid as the sort of funds you would find in most pensions so you would expect some delays but this is not an excuse that covers all scenarios.  Even when a soon to be pensioner wants to transfer funds to another annuity provider from a simple pension other than a SIPP we find huge administrative delays.  

I’ve written about the terrible pension administration delays before but I hope I’m not still writing about it in another year.  More and more people are complaining so perhaps the FSA, which recently took action over the troubles in the financial markets, will take positive steps to improve performance in this area.