The way you get financial advice is changing

I sympathise with Jeff. People coming up to retirement now are suffering from the financial crisis over the last 5 years.

I wanted to emphasize the importance of shopping around for financial products.

1.5% per annum is too much to be paying for charges on a pension. You should be able to reduce that down to no more than 0.75%. If you are 5 years away from retirement then the saving in charges can add up.

When you come to buy an annuity there is on average 25% difference in value between the best annuity and the annuity offered by your own pension company.

Annuities are effectively guaranteeing a 3% per annum investment return after charges for life. They used to pay more but in the face of the current economic situation they are broadly the same as over 15 year gilts issued by the UK Government.

No-one has to buy an annuity any more. It is probably sensible to buy one before age 75 (or earlier if your health is poorer than the average person of your age) but you are not compelled to.

There are other options. Drawing an income whilst investing in cash is one but interest rates are below 2% at the moment and so unless annuity rates fall in the next 5 years (which they might do) then a cash investment could see you lose relative to an annuity.

Lastly, don’t underestimate your lifespan. Most people do; men do so by the biggest amount. A man in good health aged 65 living here on the Isle of Wight can expect to live past age 90.

It is always worth taking advice at retirement from a proper financial adviser who specialises in this area. You will be charged for advice through a commission loading in the annuity rate so you may as well use that money with someone you trust is competent. If you don’t then the insurance company you buy the annuity from will keep the commission as extra profit or they may even pay it to the adviser that set up your policy in the first place.

This is the best Which? can do? A superficial, promotional piece by a Head of the farcical FSA? Which? supplies no analysis or critique? What’s the point of supporting this consumer advocacy with monthly subs, I could be watching the equally empty BBC.

I’m just answering the points Jeff made.

Is a 3% per annum return farcical? It is certainly disappointing. There is a very decent chance that inflation will be more than 3% so it may well be a negative real return. The return is artificially held down by QE. So there is a strong temptation to stay in cash for say 5 years and watch what happens when QE unwinds. Of course, when and how QE unwinds is totally unknown. I would say it is likely that annuity rates will rise when it does happen but it isn’t certain to.

I totally agree with you on the State pension changes Jeff. It was very unfair on those who are now having to pay a pric

The problem with waiting say 5 years from age 65 to age 70 before buying an annuity is that you lose the income in the meantime. Let me explain by a worked example. I’m looking at a man living in Ryde IOW age 65 in good health with £50,000 pension fund that he is going to buy an annuity with.

Today he can secure £2,718 p.a. Let us assume he can earn 2% interest on his savings after all charges. If he was age 70 now then £50,000 would secure an income of £3136.

Assume now that annuity rates stay unchanged in the next 5 years. In deferring the annuity until age 70, the man would have to live to 94 to be better off.

If though annuity rates improved by 10% then he would only have to live until age 85 to be better off. As I mentioned earlier, his life expectancy is just past age 90. To be better off before his expected date of death then annuity rates need only improve by 3%.

The problem facing many people in the last few years is that they have put off buying an annuity hoping rates would get better and they have become much worse. If rates were to fall by 10% then you would have to live to 132 to break even!! At age 90, you would have lost £11,500 or around 20% of your fund.

All I’m trying to say is that putting money in cash keeps the capital safe but you are quite exposed to what happens to annuity rates and thus the secure income you can take. I think they are much more likely to go up than down. If you can afford to wait for a few years before taking your pension, I’d say at least 5 years, and you can afford to lose 20% of your fund without it affecting your standard of living to an unacceptable level, then it is a gamble worth considering.

People with smaller funds aren’t forced to buy annuities by any law. When people see the cost of running a pension they can find that the extra administration costs mean an annuity looks better value on a smaller fund. Anyone with total pensions under £18,000 can take their whole fund as cash, less an income tax charge, once they are over aged 60. You can take 2 pots of £2000 or less as a lump sum regardless of your total pension fund size.

All that the 3% p.a and age 90 calculation shows is that the annuity price reflects the guaranteed investment return in the market on government bonds and the expected lifetime of the man concerned. If you are happy to accept the risk that your income could rise as well as fall then don’t buy an annuity and keep the money invested. You will still find your income limited to roughly what an annuity will buy you and your income will be reviewed every three years. It may go down by more than you imagine. My general rule of thumb is only do this if taking 80% of maximum allowed income is sufficient. If you need to take more than 80% then make sure the risks of income falling are fully explored and that you are happy to fall back on other assets if the worst happened.

Hi Jeff

The annuity is giving you c. 3% per annum underlying investment return. You also join the “annuity club”. Each year you survive, you get a benefit from those members who do not. The value of this credit is worth around 0.5% each year in your 60s but it rises quite quickly to over 2% each year in your 70s. That is the main reason why buying an annuity before age 75 is usually the best thing to do if your main concern is your personal income security.

Cash interest rates in a SIPP are about 2% at best, they may even be lower now. Please show me where you can get 3.5% in a SIPP after the SIPP charges.

Cash earns 2% and the annuity is earning 3.5% including the “annuity club value” between 65 and 70. So annuity rates have to improve to make up the difference. They probably will do at some point in the next 5-10 years. But it isn’t certain that they will; hence my suggestion that you give yourself a 20% safety margin.

The SIPP allows you to drawdown a maximum income each year set according to gilt yields in force at the time your policy is reviewed (every three years). At the moment a man aged 65 on 1 January 2013 would be able to take a maximum of £2750 per annum income from his £50,000 SIPP. The limit is about to be increased by 20% but the law hasn’t yet come into force.

I agree with the point made about cash not protecting the capital from inflation. Investing in equities when the cap on your maximum income is set by reference to gilt yields introduces a big risk that your maximum allowable income might fall. People who went into drawdown in 2007 and having their reviews now are finding that their maximum income level is reduced by as much as 50%.

Alan, that is a different point.

My point is that these insurance companies have so-called expert investment managers, and if they aren’t making much more than gilts (and they don’t seem to be able to do this) then they are not worthy of the job. I can do just as well or better with cash, and the capital is still mine if circumstances change.