Annuities, corporate pension plans and investment returns

Not much of a tax benefit, though.

It decreases your salary, actually. It costs your company a certain amount to employ you. If it didn't channel a portion of that into a pension fund, it could afford to give more of it to you directly.

Woops, previous post sent itself before I was ready.

Agreed. That's one of the biggest advantages of a pension.

Hmmm. The security is only as good as that of the underlying fund and the companies administering it. It has not exactly been unknown for such companies to go under and for the pensions to evaporate.

That's true enough, but gambling is a two-edged sword. You can not only win, but also lose. OK, you might argue that if you die early, you don't really notice that you've lost, but you *could* have had a higher standard of living for the same money.

Yes, true in general, but not for final-salary schemes.

I don't know how limited it really is. But in general it makes sense to limit opportunities to low-risk funds. You don't want to gamble with your pension. See your point "level of security".

Wrong. If you use £100k to buy an annuity returning an annual £9k income, then this most definitely implies that the annual return is much less than 9%, because part of the £9k each year is partial return of capital.

With an annuity you get capital back too.

Why indeed. Why not do both?

DG, Replying also to Gutform...

The pension is taxed when you get it. Pensions are lower than salaries so you might eventually pay less tax. But in return for that your money is sequestered out of your reach and your control. Information about the state of your future pension is notoriously difficult, nay impossible to come by. If you didn't have a pension income the state would have to pay certain benefits.

ISTM it's no good retiring with £90K in a pension fund but with say £45K still owing on your mortgage, then finding that because of Pension Credits you do not benefit from the Private Pension but still have to pay your mortgage if you don't want to be out on the street.

You mean cheat the actuaries and outlive your allotted term?

He,He,He,He,He,He,He,He,He, ! You are having a little joke with me!

To all intents and purposes, for "Ordinary" people, Yes.

Well I'd put it this way, pension funds are definitely shit.

At age 70 possibly. You might be Ga-Ga/on your last legs by then, most of our family have been, sad to say. Their needs were then simple, having the house paid off by that time figured quite highly.

I'll take your word for that.

The big players in the finance "Industry" have a lot of influence with the government.

The permitted allotment is nothing like big enough. Try summat else, as well as. By a row of houses when they are suitably cheap, fix em up and sell em on, like F2J's son for instance.

Buy a roast potato wagon then. It's a cash business and the taxman never knows how bad your potatoes are.

DG

You get tax relief when you pay the money in. You pay tax when you take it out. You are probably going to take out more than you put in ...

Yes, unless you are rich enough to go for drawdown.

I don't think it is that bad. Certainly residential property is out, but most of these restrictions are going to be dropped in the near future.

Annuities are invested mostly in long dated gilts. Lower yield, but much more importantly, the income is guaranteed, which is very important if you want to guarantee the payments

A few years ago a colleague retired on final salary scheme. The company gave him the option of choosing his annuity provider. He chose an index linked annuity from Equitable Life (not a "guaranteed" one). Since then E.L. have gone t*ts up and have told him they cannot sustain his pension payments and he will have to accept less.

It appears there is absolutely nothing "guaranteed" about annuities.

My colleague has had to go back to his old employers and require them to make up the shortfall in his pension, which they are doing, but not the index linked element.

DG

Guttorm Christensen wrote:

Well suppose the reasoning goes that you won't be a higher rate tax payer when old and crippled?

• Ronald Raygun, Dec 7, 2:54 pm:

I was thinking about the fund manager's point of view - he gets £100K. He needs to provide me 8.5% - 10.5% annual return until I die. What happens to the capital (if it is returned to me as part of annual returns or not) is in a way irrelevant - he can pocked the £100K when I die if he can deliver good enough returns.

Because of him being a professional, economies of scale etc I reckon he is able to, therefore pockets the £100K!

Yes, so the reasoning goes, but it applies only to a minority.

Most people are not higher rate taxpayers even before they retire, and most of those who are, do not become one until fairly late in their career, and therefore the bulk of their contributions will not have had relief at the higher rate.

I see what you mean, but that's not how things work. No manager can achieve returns as high as that in today's climate without taking excessive risk. That's why annuity funds tend to be invested in low-risk investments with unexciting returns, and the shortfall is made up by returning capital. The whole package is priced on a gambling basis such that you are expected to die well before the cash mountain has completely eroded, and yes, the manager then pockets what's left over.

If you live longer, the only reason he's not in trouble is the law of averages - some other poor sod snuffs it before his time, and his mountain then helps meet the manager's commitment to pay you.

There is the option of taking a with profits annuity, which follows the performance of the with profits fund, and isn't guaranteed. That is probably what he took.

In message , Derek * writes

If he was in a final salary scheme then he cant buy an annuity. He couldnt have been in a final salary scheme, it must have been money purchase.

Sounds like it wasnt 'index linked', it must have been 'with profits'.

There isnt any guarantee for 'with profits' annuities. There is a guarantee for other types though.

He didn't buy it. The company bought it, as I said "The company gave him the option of choosing his annuity provider", and the E.L. annuity (with whatever enhancements) was suggested by the company as a better value option. Realistically, with the benefit of hindsight that "better value" must have been achieved in exchange for risk of some sort.

Final salary for deffo.

All in all it does seem to be a strange thing to have happened. His pension should have been defined by the rules of the final salary scheme. He was the first employee in the scheme to retire.

DG

In message , Derek * writes

I have put it badly, what I should have said was "Final Salary Schemes don't buy annuities".

Well it cant have been a final salary scheme if an annuity was bought because his benefit would benefit in retirement would be based on his final salary OT the return from an annuity. Perhaps he transferred out of the Final Salary Scheme when he retired?

THere's absolutely no reason why such a scheme shouldn't buy an annuity for its members if it judges that to be better than to pay the required pension directly itself.

Matti

I assume you are distinguishing between the Company and its Pension Fund Trustees? The latter could be buying CPAs?

"john boyle" wrote

John, for once you're wrong here! - FS schemes can & do buy annuities.

In fact, it's pretty common when schemes are closed - whether or not they are wound-up.

But it would be hidden within the fund and would not be presented to the pensioner as being an annuity.

In message , Tim writes

I take your point, but see my other post.