Stakeholder Pension fund

I said *relatively* more expensive. The effect of "mortality drag" makes annuities more expensive if you delay purchase because the other annuitants that would have subsidised your annuity by dying earlier have been removed from the equation.

For the purposes of this example, let's say the average life expectancy of a sample of potential annuitants at age 60 is 20 years and that deaths will be uniformly spread out between ages 60 and 100.

So if you buy an annuity at 60 it will be based on an average term of

If you take income by drawdown instead and eventually purchase an annuity at 75, the situation will be different because by the time you get to 75, 15/40ths of the original sample have died.

Of the remaining 25/40ths, the average life expectancy will now be age

Therefore, the overall cost of a lifetime income is 15 years of drawdown plus 12.5 years of annuity = 27.5 x the annual income, compared to only 20 x the income if an annuity had been purchased at age 60.

The plus side to drawdown is that if you die before you buy an annuity there will be a fund to leave to your family, but it comes at a price if you survive to buy the annuity later.

(c) lying on your deathbed thinking about the 25 year old girl you bonked the night before :)

In reality the answer must be to have a mixture of investments. When you get old, you don't need a pension, you just need MONEY. Plus anything else you can get your hands on :)

As a man, I would go for 1/3 property, 1/3 investments (shares in ISAs etc), 1/3 pension fund.

As a woman, I would go for 1/2 investments, 1/2 pension fund, and get married! Most women seem to just do the last one, and when 40-50% of them divorce they realise they can barely manage and this is one big factor in the bitterness in those situations.

Yes, there is no first order difference between a PP and say an ISA. The benefit of a PP is in that IF you are paying tax at 40%, when you retire you are likely to pay it at say 25%. But against that you have the insurance charge on the PP, because with a PP you are in effect purchasing an insurance policy against living longer than average.

That's before you get onto the inflexibility of a PP, in various personal circumstances.

Hmm. Doesn't sound like much of a difference to me, provided I'm allowed to assume that the fund he could have spent on an age 60 annuity (say £200k to give £10k pa for life) is invested earning a decent rate of interest. Provided this rate is at least 3%pa, it should about break even. To buy an age 75 annuity giving the same pension would cost £125k, so without doing the full exact cash flow, he could fund a £10k DIY pension for thef irst 15 years by drawing down £5k pa and earning £5k interest pa, and 3% of the average balance of £162.5k is not far short of that.

Most emphatically not.

Mr Sample requires a £10k pension (an arbitrary figure, scale it if you like). Using your figures, an annuity to provide this pension from age 60 will cost him £200k [plan A], or £125k if he buys it at age 75 instead [plan B].

Now assume he is 60 and has the £200k sitting around in cash, and therefore has the option to go for plan A. But he could also go for plan B, provided he can meet his requirements for the next

All I'm saying is that provided his cash is in safe investments returning (just over) 3% net pa, he can do it.

Mind you, my example does assume zero inflation, so the 3% would have to be in excess of *that*.

Yeah... you're right. :-( I'm glad I phrased that as a question!

The investment return built into the annuity rates would just reduce the £200k & £125k figures by a similar percentage.

"Gareth Kitchener" wrote

Eh? I wouldn't think so!

For instance, take the extreme - instead, compare someone aged 60 to someone aged 105. Someone aged 105 might only need to pay very slightly over 10K to buy a 10Kpa pension (assume it is paid yearly in advance, not monthly - and they are (unfortunately) quite likely to die before the year is out).

Whatever percentage the 200K (for the person aged 60) would reduce by for a higher investment return, it is highly unlikely that the 105-year-old's figure of "just over 10K" will reduce by the same - it still needs to be at least 10K, to afford the first payment...

Of course, for someone aged 75 it will not have such a marked effect - but the percentage the 60 & 75 year-olds is unlikely to be the same, by the same token as the 105 year old.

I did say "similar" not "the same". ;-) For a 20 year term a 3% growth rate would reduce the up-front cost by around 25% but this would only be 15% for a 12.5 year term.

"Gareth Kitchener" wrote

Ah, I see - different definitions of "similar" ! :-)

I wouldn't consider 25% & 15% to be that "similar" ...

Neither would I really.... but I didn't bother to do the maths until after you questioned it. ;-)

In message , John Smith writes

No. The discount offered by the underlying fund managers when buying through them is usually larger than Skandia's charge so it is usually cheaper to buy via Skandia than direct from the fund manager.

Agreed. Its determining the attitude to risk that is the hardest thing.

I remember a few years ago. "I want something safe, definitely safe. I dont want any risk at all." then three months later "Why didnt you recommend that Aberdeen technology my friend is making a packet!" :-)

In message , Peter Saxton writes

Well in 1995 total Gilts in issue were £297bn

I havent got the ftse total but vodaphone £80bn, + HSBC £85bn + BP £96bn

• RBS £49bn =£310bn

Havent found the totals yet.

In message , Peter Saxton writes

He hee!

No, I just googled and there was a treasury page for 1995! It suited my use so I used it! I didnt see any other figures. The others were from FT.COM in real time. Sorry!!

(I did see that the BoE registers only half a million transfers of gilts a year, which I thought was quite low)

I remember reading something like that years ago!

Incidentally, how much would it cost to purchase a straight insurance policy against living for too long? Would this be cheaper than buying an annuity?

Very much so. I could recommend a syndicate based in Sicily. They can make sure the need for a payout will never arise.

"John Smith" wrote

Are you interested in tontines?

I'm not sure what you mean by "particularly low", but for the majority of people buying annuities the mortality factor is easily enough to mean that annuity rates are well above gilt rates (assuming that's what you mean by market returns).

According to Money Observer the best single-life flat annuity for a

You've never heard of "the ultimate sacrifice"?