Question on Market Value Reduction of Pension

"Tony H" wrote

Unfortunately, it's not "oddly" - it's the law! [AVC's being linked to the relevant company scheme.]

"Tony H" wrote

This'll (probably) be because you were effectively being treated as taking the pension "early" (at the time you retired from main scheme) ...

They claim that they didn't know I had retired, but in fact I wrote and told them so at the time.

I did get a quote from them at the time but didn't take it up (due to the advice from my broker). That offer was considerably higher than they're offering now, even without the Market Value Reduction. I'm puzzled as to why they didn't tell me about this MRV before I accepted their offer. It all looks rather arbitrary and very supsect to me.

TH

In message , Tony H writes

The MVR is legit, but the brokers advice seems wrong, not because of the now lower fund value, but because you SHOULD have taken the AVC benefit when you retired on your main scheme and because the old argument that leaving a pension to grow and to get a better annuity doesn't fully stand up because it takes 13 - 15 years before the lost annuity for a year is made up by the slightly higher annuity which you buy later.

Sounds like you may have a negligence case against the broker?

Is it not normally the case that you cannot take the AVC pension

*before* the main pension, but that you are free to take it any time later? Or does that only apply to free-standing AVCs?

Eh? Surely for each year you delay buying your annuity with the pension fund, you will get a better annuity rate, *and* the pension fund will probably grow, so it should *always* be better to delay. (Assuming of course you plan never to die, or that it is more important to you to get more per year than more all told).

In message , Ronald Raygun writes

But you lose a years income, which takes time to recoup.

"Ronald Raygun" wrote

I think John is trying to say that the amount of money in (A) below is more than that in (B):

(A) First ten years (say) of an annuity taken immediately; (B) First nine years of an annuity taken after a delay of a year.

OK, in (B) when you've eventually started the annuity, you're getting more per year - but as you had nothing for the first year, the total sum received over the first (say) ten years will be less than if the annuity were taken immediately...

The "advice" was given on the 'phone, not in writing.

After talking to Eagle Star about the ins and outs of this I've decided to cancel and delay taking the pension until things become clearer. My understanding on MVRs was that they weren't applied to matured policies.

It seems odd that someone can take 25% of my money that was placed in their care until I reached retirement age and put it into some corporate slush fund. In other walks of life this would be a criminal offence!

TH

Yes, and moreover he's saying that if you replace the nine in (B) with 13-15, and the ten in (A) with 14-16, you'll about break even. So you're better off going for option (A) only if you expect to die before the break-even period is up. Far better to put up with one lean year in order to fatten up all your other remaining years, no? Especially if we plan to live forever, which we all do, don't we?

But surely you have to take the AVC pension now - there is no choice - as you are already taking the main pension?

"Ronald Raygun" wrote

I don't think you even need to live forever - just longer than assumed within the figures underlying the annuity rates. But then, I strongly suspect (!) that the annuity provider will have considered the underlying mortality rates very carefully....

Dunno, but in the quote thay last sent me it stated that I didn't have to take the pension now, but I have to take it before I'm 75. I'm confused by the whole thing because different people say different things.

TH

Yes, and we don't even need to live that long, just plan to. All that matters is that we know we've got one over on them. Then if we do die earlier than we'd hoped, it's just "c'est la vie". When it's all over, we won't be able to kick ourselves any more.

Yes, well, annuity providers are like bookies, they rig the odds in their favour. But we all fancy ourselves as being lucky.

In message , Tony H writes

I think the point may be that because legislation says that you should have taken the benefit form the AVC when you retired early, and because the AVC had been written to a later date, then you where encashing it early, not at the intended maturity date. The compulsion to take benefit when you retired means that E Star have to backdate the benefit.

You've lost me there.

No, because the discounted value is even greater; you become less and less expensive to run the older you get (apart from LTC that is), and you can get a better return from the income that you will inside an AVC

The pension income is for spending, not investing, so I'm not sure what the relevance of return from income is here. Are you suggesting that by taking the lean year's income and investing it rather than spending it, that will make up the difference, boosting the subsequent years' income to the level it would have been had the first year been kept lean?

We are comparing total return.

The question is 'should we take the pension now or later?' If you are asking this question it that shows you dot need to spend it now, otherwise your question would be 'how soon can we get our hands on the dosh'.

Somehow I suspect Im walking into a trap , but here goes anyway....

In short YES, but not quite as you describe it. My analysis is based on total return, not income.

Indeed it is. It will be answered principally in terms of maximising long term retirement income.

True. This is after all only an AVC, a pension top-up. By foregoing it for a year one would not exactly be condemning oneself for that time to a diet of baked beans on toast during the week and spaghetti with meatballs on Sundays. It's more like whether you wash down your smoked salmon starter with Cava instead of M&C.

Heh, heh, heh. Not to worry, I think you may be right.

The way I look at it is that option 1 is you cash your AVC fund in now, and buy an annuity this year, option 2 is you leave the fund to grow for one more year and buy the annuity next year. Next year, due to your increased age, the annuity rate will be better, and also the fund will be bigger, so you benefit from a double win.

Option 1 might give an income of £1000pa, option 2 perhaps of £1090pa.

For a fair comparison we can make option 2 the benchmark, and see whether by going for option 1, and investing the first year's £1000 income, we can amass enough of a lump sum by year end that we can buy, at next year's rates, an annuity paying more than £90pa.

We have to do it that way because we can't just go for a DIY investment with ad hoc drawdown unless we've pencilled our death date into our diary.

Whether it all works out will depend on what typical rates for growth and annuities really are. I don't know what they are, but when I tried to work out the alternative investment growth requirement, having picked some figures out of the air, the proposition turned out to be a complete disaster, but when, given a growth rate, I worked out what annuity rates *should* be in relation to it (assuming a non-profit annuity provider) it looked rather good.

Two hitches to bear in mind are that the first year's £1000 ain't released in a lump sum at the start of the year, but in monthly dribs and drabs, so you effectively benefit from only about half the rate of RoI you can achieve. And then there's the tax issue, unless you can get tax relief on the investment (since the annuity income will be taxed, won't it?).

In message , Ronald Raygun writes

Please pardon the big snip, I am replying to your entire post.

I have carried out the analysis a number of times over the years on a spreadsheet that shows that the principle remains the same no matter what annuity rates or growth rates are. The ss makes the same assumptions as you did but used real annuity rates. Although annuity rates change, the relationship from one age to the next seems pretty constant.

If we just compare on absolute value, excluding NPV and return on the investment of the annuity received, it takes over 11 years before the total cumulative annuity income received by waiting a year exceeds the total received by taking it now. If we then overlay the return on investment of the annuity plus the NPV generated by getting it now, then it becomes even more advantageous. (In the example above it assumed that the AVC fund was growing at 7.5% per annum, which is ludicrous today, of course, so it will be longer now before the breakpoint is reached.)