How soon is soon?

We are often asked how long before retirement should I start thinking about pensions? I think that a sensible timeframe is to start to gather information up to five years before retirement. This will include going to DWP website and asking for a forecast of State pensions using form BR19 as well as making sure that all other pension providers have an up to date address – really important when it comes to old company schemes.

The time to really start to look around is about twelve months before retirement. It is at this point that you will learn a whole new vocabulary – guantee periods – widow’s pensions, capital protection etc etc. Take your time – think about the options – make sure you understand the implications. Remember you can only buy an annuity once – so the message is get it right. Look at a variety of quotations – quotes can be gained from www.annuitydirect.co.uk - the service is free and you can run as many quotes as you like as often as you like.

Income Drawdown

A really useful tool – in the right hands. By that I mean someone who can genuinely take the risk of their income falling. That means it is not for the faint hearted or those with small pension funds . In effect there must be sufficient cash in the total portfolio (non pension and pension assets) that enables the customerto stop drawdown in the event of a fall in fund value. It also means that a yield needs to be calculated that defines the yield needed on the fund to be able to continue to draw the annuity that could have been purchased at outset. In turn that means finding the best annuity quote (including medical enhancement) and then doing the critical yield. Unfotunately insurers do not do this meaning that many critical yields are understated.

Simple message – oproceed with care and make sure whoever you are talking to is a specialist with specialist qualifications (shorthand jargon would mean passing G60 or J05 exams).

Tory Policy

I would like to thanks Tim for his comments which in many ways explained what I was trying to say – in a better way! He is quite right – some people are perfectly capable of managing their cash flows from a fund and that is why I am supportive of the removal of the 75 rule. Equally there are many people who have become used to the idea of regular income – salary – and want to be certain of the security of monthly income. For them the annuity route provides peace of mind.

Tim makes an excellent point about escalating annuitites. I always think of this in simple terms. The actuary will calculate your life expectancy. Regardless of whether you take a level or escalating annuity your funds wuill be depleted at that theoretical life expectancy. So, if you die before that point a level annuity will benefit you but if you live beyoned that point an escalating annuity is more beneficial. There is however one wild card – inflation – anyone who remembers the 70′s will know that if we get hyper inflation an RPI linked annuity will pay off in spades. All of which proves that what we all need is a crystal ball!

Tory Policy

I see that the Tories are promising to stop the rule that requires an annuity to be purchased at age 75 which is attracting some support from a number of quarters. I have to say that I think this is a good idea in that it frees up choice for the individual. We talk to many clients before the age of 75 about annuities or taking an income from the fund through unsecured pension (drawdown). When the risks of Unsecured pension are properly explained by far the greatest number of clients decide that they want secure income and buy an annuity. If this Tory policy comes to pass the danger will be that people do not buy an annuity for the wrong reasons and end up with a variable income with which they are not comfortable. My advice to the Tories would be to lean on the regulators to ensure that anyone giving retirement advice is appropriately qualified and regulated – otherwise this could be a spectacular home goal – remember the pension transfer scandal of the late eighties?

Final thought – could this just be a Revenue raiser in that the Tories will claim back the tax relief given on the premiums?????????????????????????

Guarantees

When I first came into the business ( a long time ago) every pension was set up to be paid monthly and guaranteed for five years. This had some logic – retirement age was 65 and life expectancy three score years and ten for a male.

But life has moved on and I still wonder at the amount of five year guarantees that are purchased. In most cases for a very small reduction in income a ten year guarantee can be bought which is much more in keeping with today’s longer life expectancy. That is why when people go to our web site we  initially give a variety of quotes including ten year guarantee. www.annuitydirect.co.uk

To Defer or Not

I am becoming concerned at the amount of publicity that seems to be around suggesting that people should defer their retirement income and buy an annuity when they are older. This seems to imply that the income will be higher as the individual will be older. I think this is an argument that is too simplistic for a number of reasons.

1. It assumes that rates will be higher. This might be a high risk strategy if solvency 2 becomes reality.

2. It ignores the lost income that would have been paid during the deferral period. To look at this properly a cash flow analysis needs to be carried out which will give an idea of how long some one will have to live beyond a deferred annuity purchase date to recoup the lost income and also calculate the growth required on the pension fund to reduce the break even point.

This is where the Living Time/LV= product can be useful in that the final annuity purchase decision can be delayed withiout losing income. BUT there is no guarantee that the income can continue as it will depend on rates available in the future.

New Product

Interesting to see LV= launch their fixed term annuity. This is similar tio the Living Time product. My initial reaction having scanned just a couple of quotes is that the risk of income falling at the end of the term is not sufficiently visible. They allow income to be flexed up to 120% of the maximum allowed for unsecured pension but the temptation to take maximum income will reduce the amount returned at the end of the term and thus increase the risk of income reducing. I am also concerned that the possibility of falling rates as a result of solvency 2 makes this quite a bit more risky than is immediately apparent.

I hope that LV= is not going to follow the traditional insurer route of getting the highest quote and hang the consequences!!!! I intend that Annuity Direct will look at Living Time which makes an attempt to smooth income at the end of the term by providing a balance bertween income now and maturity value.

Next Generation

The Bank of England’s decision to hold quantative easing could in therory lead to a rise in bond yields and therefore annuity rates were it not for the massive threat from Europe of solvency 2. I really am at a loss on this. For hundreds of years UK insurers have successfully managed their investments with very rare financial failure. Why do we now need Eurocrats to come along and reinevent what to date has been a perfectly round wheel? The wheel they are inventing is square and will have a massive impact on the next generation of pensioners who will be worse off as a result of  European interference in our highly successful insurance industry.

Crystal Balls

As part of my thinking I have been mulling over the likely direction of annuity rates in future. They rely on interest rates and the amount of time the actuaries believe we will live for. Over the last ten years longevity has been increasing and interest rates falling with the result that there has been a ‘double whammy’ impact. Everyone is forecasting lengthening lifespans and so the big question is the direction of interest rates in the future. But the wild card is whether solvency 2 will offset any general rise in rates.

This for me is the biggest issue and the jury is out. I shall continue to ponder what actions should be taken now.

Time to think about retirement advice

I spent a fascinating day in London yesterday talking about the impact which the EU solvency 2 proposals will have on annuities. The general view seems to be that it will happen and that it will mean a fall in annuity rates. There is not agreement on the amount of the fall with estimates varying between 20% and 30%.

I need to spend time reflecting on how this will affect how we advise people at retirement. There are lots of things to think about and research so watch this space!