Level Annuity: Why?

I can quite well understand why people may not want to consult a financial advisor, given that he may be influenced by commission. However, the client should be amenable to paying a fee. After all, he pays his accountant and solicitor and undertaker - none of whom work for nothing.

Also, it may not be well known but nowadays an advisor who holds himself to be independent has to offer the fee option. So why don't those who feel that there may be a commission bias take this option? OK £200 an hour may be a bit steep but there are plenty who would do it for less - just ask them. And if you buy a product from them the commission will be reimbursed to you. So you might end up in pocket.

Just don't throw the baby out with the bathwater but looking at the subject with heavily tinted specs and by classifying all advisors the same.

Rob Graham

In message , Mike Bending writes

When I was reaching 65, I knocked up a simple Excel calculator to see what you got from an escalating pension compared with a flat-rate pension.

At 65, for 3% compound escalation, the initial pension is (typically)

60% of a flat-rate pension. It takes 18 years before your annual pension even exceeds the flat-rate, and a further 12 years before your total pension income exceeds the flat-rate.

Even assuming that inflation (etc) isn't going to devalue your pension income, unless you're going to live to at least 105, it's really a no-brainer. I took a 25% lump-sum (banked in my wife's name to avoid tax on the interest), and a flat-rate pension (partly with 5 year and partly with 10 year guarantees).

Makes sense. Actually an IFA has offered to produce a report for £500 and I've asked him to go ahead. But I'll retain a degree of scepticism, and will only act on any advice if I'm sure I understand it and agree with it.

Chris Gordon-Smith

Fair enough. I think what I would _really_ like is something inflation proof, which means RPI linked. However, I'm getting the distinct impression that it would be *very* expensive.

Chris Gordon-Smith

But of course. You certainly wouldn't want to go ahead with something you didn't agree with. Whether you actually understand it of course is another matter. Some topics take a bit of getting your head round! I suspect you are quite happy to drive a car but may not know how it works.

Rob

One option is to say to yourself "I'll take the level annuity because that gives me the most initial income, and put what I don't need in some savings plan to draw from when inflation has reduced the value of the level pension".

You're right - inflation-proofing IS very expensive. But the above option ticks all the boxes (except possibly tax).

Rob

A reasonable enough point. Actually I broadly do know how a car works, and I do think it helps. One of the reasons I never bought a two stroke engined motorbike (apart from the dreadful sound) was that I couldn't believe that a two stroke engine could actually work.

Chris Gordon-Smith

Thanks. Sounds like a possibility. Perhaps I'll try some numbers to see how it works out.

Chris Gordon-Smith

It'd be interesting to see what you final decide. Betcha go for the level.

Rob

I know. Magic, isn't it? But they do work and you might like to have a look at this

if you have any doubts! A bit OT here. Rob

< snip >

Great link - thanks! Think I'll fit one in my mini, though I might need to enlarge the fuel tank.

I know. There's always a snag to everything.

I'm beginning to see the argument for it. But I don't have to decide for a few years. At the moment I'm just doing some background research. The main thing I have to decide now is how much to get out of equities, and what to replace them with.

Chris Gordon-Smith

"Ian Jackson" wrote in message news: snipped-for-privacy@g3ohx.demon.co.uk...

It's usually a lot more than 60% - was yours a joint life with 100% spouse's pension?

For male single life it's usually over 70% at 65.

Or on these figures:

With 6951 level or 5027 with 3% escalation, the income is greater at

76, the total is greater at 86, and the total plus interest at 3% is greater at 89.

How can it "tick all the boxes"? If you live till 100 you'll have used all the savings you made in the early years a long time ago and be on about half the real income you'd have had if you'd got the escalating annuity.

Tax & benefits come into the equation, but which way gets you the most benefits and the least tax will depend on a myriad of things.

In message , Andy Pandy writes

Admittedly, 60% was an 'off the top of my head' figure. From those figures, it is obvious that the difference decreases the later you start your pension. Maybe it was a bit pessimistic! But (for 65) it still takes 11 years to exceed the annual flat-rate, and 21 years to exceed the total flat-rate.

Presumably the 'total plus interest at 3%' refers to the situation where you bank the difference between the flat-rate and the escalating, until such time that the escalating exceed the flat. Obviously, at the moment, interest rates are pathetically low. If you opt for a flat-rate pension, the problem may be just what to do with all that 'spare' pension income you receive initially (which you may not need).

In the end, it's important to weigh up the options, and decide what really is best for you. There are so many permutations and combinations. Most important, it's essential that your crystal ball has been recently serviced, and that all the upgrades have been downloaded and installed.

"Ian Jackson" wrote in message news: snipped-for-privacy@g3ohx.demon.co.uk...

Yes, and at that point (age 76 in this case) start drawing down on the savings until it's all gone (age 88).

I think the best way to do a spreadsheet is to "keep it real" ie everything in real terms, so you can see what the situation is in the future in today's money.

So if you assume 3% inflation, for the level annuity divide by 1.03 each year and for the 3% escalating annuity keep it constant. If you then assume 3% interest on savings it's easy - just add the difference between the two each year since the interest is exactly maintaining the real value of the savings.

And don't be too scared of taking risks - we all take much greater risks every day and the very worst that can happen is you'll end up on minimum state benefits - which for pensioners are actually pretty good, and are likely to remain so since pensioners are good voters.

Because, ime, they recommend from the same limited range of products they do on commission. No mention of low cost, high flexability SIPPS, no mention of ETFs, no mention of investment trusts.

The only IFA worth considering is one working on a fee only basis, in a fee only practice.

Yep, if forced to take an annuity rather than an unsecured pension (USP) (aka income drawdown) I recommend taking the level annuity and investing the excess over the index linked annuity rate -

Is a USP an option for you ? Are transfers permitted ?

Conceptualy, you need to index link your subsistence income, freeing up the rest for inflation beating investments. Long term, equities have been the best investment, returning 5.3% over and above inflation (the 'real return') although they can go through periods of decades of underperformance. However, if your pension is large enough to cover your subsistence needs even in years of poor returns and income, then it makes sense to avoid annuities due to ther high cost.

hth