Annuity Warehouse

Insurance companies in talks over a higher income drawdown allowance

Peter — Wed, 11 Apr 2012 08:36:36 +0000

The insurance industry association the ABI are set to have discussions with the government over increasing the amount of money retirees can drawdown from their invested pension funds. The amount that can be taken is capped by what are known as GAD (Government Actuary’s Department) rates, which have fallen in tandem with lower annuity rates. Drawdown allows retirees to keep their pension fund invested whilst also being able to withdraw an income each year and is a popular alternative to taking an annuity. As well as falling annuity rates on the back of lower gilt yields, another factor which has pushed down GAD rates is that of increasing longevity. This has resulted in the government cutting the amount people can withdraw in income from 120% of the GAD rate down to 100% this year.

The ABI is said to be consulting with it members over how to present the case of retirees not being able to draw as much from their pension fund as they could previously. There is also discussion about whether annuity rates should be priced against gilt yields, given that they have dropped so low in recent months. An ABI spokesperson said that…”…we will be discussing this issue with members to agree a common stance. We have put this on the government’s radar but we have not yet entered formal discussions, pending the formulation of policy after consulting members.’

The reason why the ABI will be pressing the government is that payouts from income drawdown have fallen sharply for many retirees. For example a 65 year old with £100k fund that retired back in March 2007 could have expected an annual income of £8,640. After a fund review in 2012 the income level could drop to £6,600 a year which is almost one quarter lower than five years ago. The FSA estimates that around 250,000 income drawdown plans have been sold in the past five years, meaning thousands of retirees could be in for a shock when they find out just how much their income could be falling. The value of their funds have been rocked by poor performance on the stock market, notably from investments in equities.

Delaying an annuity or income drawdown? Why both could cost you in the long run

Peter — Sun, 08 Apr 2012 12:13:16 +0000

New research has shown that more than 50% of IFA’s are recommending to either delaying taking pension benefits or alternatively recommending clients opt for some form of phased drawdown. The poll of 1,000 financial advisers undertaken by Skandia showed that 29 per cent of IFA’s have advised customers to use other forms of savings for an income such as an ISA and to leave their pensions fund where it is, with the option of choosing drawdown in the future. In addition to this, 22% of respondents are actively recommending drawdown so as to not commit the entirety of their client’s pension fund whilst annuity rates are so low. Despite a small upturn in gilts reported earlier this month, the general trend for the past few years has been a continued fall in gilt yields which has equated into falling annuity rates. Rates have been driven down record low interest rates from the Bank of England plus the government’s own quantitative easing initiative, designed to stimulate growth in the economy. Both these factors have help to push up the price of government bonds and so lessen the yield for those insurance companies who have invested in them.

With all this considered, it is obvious to see why retirees would be hesitant to commit their entire pension fund now to a life annuity whilst rates are so low. In general terms the older you become, the better annuity rates you should be offered, as insurers calculate that you will live for a shorter time period. Moreover should you develop any medical conditions in the interim, then you could in future qualify for enhanced annuities, which pay up to 40% of more in income. In addition to all this, rates themselves could improve if there is a rise in interest rates or the price of government bonds fall.

However, delaying buying an annuity also carries it own risks. For example if you are offered an annuity today paying you £1,000 per year but in 12 months are offered £1,100, it will take you ten years to recoupe the missed income you would have got had you bought an annuity now. Rates are not predicted to rise significantly in the next 12 months and in fact they could fall further due to new legislation. Firstly there is the ban on gender pricing which will end insurers being able to offer men better rates than women who statically live longer. The consensus on this seems to be that instead of rates being equalised male rates will fall with female rates rising slightly. Secondly there is the continuing impact of Solvency II which requires insurers to retain more capital on their balance sheets, again restricting the amount they can offer in retirement income. Finally life expectancy is rising not falling, so there an in increasing number of retirees who are living for longer and longer.

As well as the risks of delaying an annuity, opting for drawdown can also have some drawbacks. Firstly the amount you can withdraw is capped unless you have a significant income outside your pension benefits. This limit is also linked to the performance of gilts, so they would need to increase in order for the cap to be raised. Secondly there are the added costs of administering drawdown as the plan needs to be reviewed on a regular basis. It is for these reasons that drawdown is generally only suited to those who have saved a large pension fund, which means it is only really a viable option for a minority of pensioners.

So with drawdown being relatively “expensive” and only suitable to a minority of retirees coupled with the fact that annuity rates are not predicted to shoot up anytime soon might taking an annuity now be the safest option? One way you can boost your retirement income if you are intending to buy an annuity is to shop around for the best deal. This is one of the simplest ways to increase the amount of income you receive in retirement but is an exercise many retirees do not undertake. As mentioned, if you qualify for enhancement on your annuity you will be offered a higher rate compared to a level annuity. Some estimate that as many as 70% of those buying an annuity quality for some form of enhancement, depending on their state of health at the time.

Another point worth noting is that there are many different annuity products on the market which can offer some investment options such as with-profits annuities, which pay a guaranteed income with the chance of a higher income should the invested part of your fund perform positively. This type of annuity provides a balance between an secure and regular income but also allows for some risk to be managed in exchange for a potentially higher income should the investments perform well. As well as investment-linked annuities you could also consider fixed term annuities as a means of securing an income in retirement without committing 100% of your pension fund in one go. These typically last for 5 or 10 years and pay an annual income but are only funded by a proportion of your pension pot, rather than all of it, leaving the rest for future investments when the economic climate and/or your health may change.

So there are plenty of options out there, not all of them maybe wholly attractive given the back drop of record low annuity rates. Given that no-one is credibly predicting they will rise significantly in the short or medium term then the most sensible option is to make as much from your pension fund as possible. Get sound advice on what options are open to you and mostly importantly shop around between providers for the best rates.

Government to fund 1 in 6 retirement’s in 2012

Peter — Thu, 05 Apr 2012 14:07:25 +0000

New research from the Prudential has found that the state will this year be funding one in six people’s retirement’s, with no other contributions being made from occupational or private pension funds. This is because one in six people retiring this year have no pension provision other than relying on the state pension of just over £107 per week. This comes at a time when the government has announced they are cutting the pension credit for the poorest pensioners which could see them losing as much as £276 a year. If the figures in the research are accurate it could mean as many as 50,000 retirees living on just £5,587 a year. The very poorest UK pensioners are entitled to the greater sum of £142.70 a week (£7,420 a year) through means of the state pension topped up with pension credits. But over £5bn worth of credits remain unclaimed, meaning thousands may potentially not get the full amount they are entitled to. Some charities such as Age UK argue this extra money should be given automatically rather than individual’s having to claim for it themselves.

For those that have got some form of pension savings and were planning on cashing it in for an annuity, there is also little to cheer about. Despite some providers recently adjusting their rates marginally upwards (including Aviva and Hodge lifetime), a £100,000 pension pot still only equates to £5,300 a year in annuity income. Given that the average fund is around £30,000, the average annuity income will be much lower than this. However there may be a glimmer of hope for retirees according to annuity expert Billy Burrows. He thinks that…”…annuity rates have reached the bottom of the current cycle and we may see some very small increases until the double whammy of Solvency II (bank reserve rules) and gender neutral pricing kick in at the end of the year.” This statement maybe in reference to the news we published earlier in the week which showed that some providers have already adjusted rates upwards on the back of higher gilt yields. But as Billy notes, this may only be short term once Solvency II and gender-pricing legislation kicks in.

Recent rise in gilt yields predicted to push up annuity rates

Peter — Sun, 01 Apr 2012 10:18:49 +0000

Long suffering pension savers received a glimmer of good news last week when it was announced that there had been a small rise in gilt yields. Gilt yields are used by insurers to price annuities and when they rise the providers of these annuities are able to offer better rates as a consequence. Rates have fallen over the past two years due to lower gilt yields coupled with increased longevity. In addition to this, those drawing their pension via capped drawdown have seen the amount they can withdraw drop by 50% over the same period.

15 year gilt yields had fallen as low as 2.25% earlier on this year as worries about the debt crisis in Europe coupled with the impact of quantitative easing put more downward pressure on annuity rates. However, they have now pushed back up again to 3% meaning providers will be able to improve their rates for annuities as a consequence. Two providers have already made adjustment to rates including Hodge Lifetime and Aviva. According to data provided by the The Annuity Bureau a man with a £100k pot can now get £5.88 per £100 up from £5.86 in February.

However not all rates will see an immediate increase according to annuity expert Bob Bullivant. He says that…“…if a rise in yields was followed by a fall, providers would be exposed as they have to guarantee their annuity rates, and would not want to commit to higher guarantees prematurely. My suspicion would be that they are waiting to see if the current rise is sustained before moving their rates.” However, income limits for those using capped drawdown is expected move up right away, allowing an extra £1,000 to be added to the annual limit, based on the aforementioned illustration.

Any rate rise will be warmly welcomed by those approaching retirement, many of which have seen their expected retirement income level fall due to high inflation, low interest rates, poor stock market returns and increasingly life expectancy.

One million retirees forced back into work

Peter — Sat, 24 Mar 2012 20:26:56 +0000

A new survey conducted by MGM advantage has found that around a million retirees in the UK have had to go back into work because their pension income is not sufficient to cover their monthly outgoings. Low annuity rates, high inflation and poor returns from savings are some of the principal reasons why so many retired people have had to return to the workplace. Aggregating the work that these people collectively put in equates to 300 million hours a year in part-time work. The majority of those ‘working in retirement’ only work a couple of hours a day. However a considerable number (70,000) are working more than 16 hours per week and nearly 30,000 are working more than 20 hours a week.

It must be noted that not everyone who works in retirement is doing so unwillingly, some of course will be fit and healthy and will have no desire to stop working. However a substantial proportion will only be continuing to work because they cannot afford to retire. Low interest rates mean those with savings are making minimal returns. In addition to this, anyone who recently cashed in their pension to buy an annuity will have done amidst record low rates. On top of all this the cost of living is rising with hikes in essentials such as food, energy and fuel. Experts argue that many going back to work in retirement are doing so just to earn a small sum of extra money per month that can make all the difference.

The situation may well be different in the future however as those working in their 20′s and 30′s are likely to work well past 65 as they started working later than today’s retirees. They may also have student debt to repay and in many cases will go on to live well into their 90′s, thus retiring at 65 will be unaffordable. Just to earn an annual retirement income of £22,000 requires a pension fund of around £450,000 which will of course take a considerable number of years to accumulate.

‘Matching Premium’ saves UK from from lower Annuity Rates

Peter — Fri, 23 Mar 2012 08:23:18 +0000

UK annuity rates could be protected from further sharp falls in the future by means of a last minute intervention by UK politicians and insurers. The intervention means that new EU Solvency II legislation will include a so-called ‘matching premium’ which ensures that insurers will not be penalised by ‘market volatility’ they are not exposed to.

It it thought that had the premium not been included in the legislation then collectively UK insurers may have had to keep an additional £50bn in capital, which could have equated to a fall in annuity rates of up to 20%. However it was not all good news as the ABI’s representatives still have concerns over asset allocation, which could still potentially mean a fall in rates. Solvency II has been brought in to protect consumers from the threat of their provider going bust as the new rules force companies to hold more of their own capital on their balance sheets. However the net result of this is that there will be less money to offer out in retirement income, meaning lower annuity rates.

Otto Thoreson, the ABI Director General said that… “…the measures agreed in the ECON committee of the European Parliament are far from perfect but pave the way for a constructive discussion in the next phase of negotiations on Solvency II. We urge the finance ministers, the European Parliament and the European Commission to work together in the weeks to come to address the outstanding issues. He added that it was vital that insurance companies can offer products with long term guarantees as retirees were relying on these for their income in retirement. He also added a note of caution that the final text of the legislation must not ‘constrain European insurers’

New calculation could see public sector pensions fall by 15%

Peter — Wed, 21 Mar 2012 10:12:32 +0000

A change to the way that increases in public sector pensions are calculated could see as much as 15% wiped off their value according to some trade unions. Using CPI inflation as a measure as opposed to RPI, which is often higher, could see as much as £47,000 wiped off the pension pot of someone who draws £10,000 per year in retirement. Ros Altmann from SAGA says that the move…”… will mean lower pensions all round, there’s no doubt about it. The change from RPI to CPI is not about having a better measure of inflation, it’s about cutting costs.” Ms Altman conceded that the CPI/RPI switch would make pensions more affordable and sustainable in the long run but that it would mean individual’s would have to save more for retirement.

RPI inflation (Retail Prices Index) is more often than not higher than the CPI (Consumer Prices Index) as it includes the costs of mortgage borrowing. The unions tried to challenge the government about the change in calculation but were not successful in their legal action. Brian Strutton from the GMB said that…”…unfortunately, the courts seem to take the view that the Government can do what it likes even if this amounts to taking money off pensioners just because they used to work in the public sector.” However it is believed that the Unions plan to appeal the decision of the court to rule in favour of the government.

There is now also concern that CPI inflation will become the preferred method for measuring occupational pension uprating. Using CPI is likely save the government billions of pounds in the future. It is by far the most controversial change in public sector pension reform outweighing anything contained within the Hutton report. Whilst those in the private sector may still look on with envy at the pension provision in the public sector, the reality for many will mean that they will either have to save more for retirement themselves or alternatively reduce their expectations over future living standards.

Over 50′s hamstrung by interest only mortgages

Peter — Fri, 16 Mar 2012 17:28:21 +0000

Thousands of over 50′s are facing the daunting prospect of not being able to pay the remaining balance on their interest-only mortgages, once the mortgage term comes to an end. Speaking to the Treasury Select Committee, the Financial Services Authority (FSA) stated that there was a “…..ticking time bomb that has been created over the last twenty years and what we are trying to do is make sure that time bomb does not get any worse.” Better regulation of lending will help in preventing this scenario occurring for future generations, but for those already decades into an interest only mortgage, there is a real question over how the balance of these mortgages will be paid. It has been estimated that there is around £120 billion in payments that need to be made over the next ten years. Under an interest-only mortgage, the balance only becomes payable at the end of the mortgage term. When you take an interest only mortgage, the lender normally advises that money should be put aside in the future to pay off the remaining balance. However many people who have taken them are unlikely to have saved this additional money.

Interest only mortgages became popular in the last property boom and made up one third of all mortgages in 2007. Because the price of property was rising steadily each year, those taking these mortgages were seeing their borrowing capacity rise as the value of their property was outstripping rises in wages. However after the credit crunch they have all but disappeared, along with other incentives such as borrowing 110% of the property’s value. For those who have only recently taken out an interest only mortgage, they have the chance to save for the future in order to pay off the balance when it becomes due. However for those over 50′s who maybe retiring in the next few years there is the real problem of how to pay off the balance when they will no longer be earning a salary. One vehicle many over 50′s are increasingly turning to is equity release, which unlocks the value in one’s home. However with an interest only mortgage this option will not be available as the individual will not own the property outright.

Over 50′s entering the most expensive period of their lives

Peter — Mon, 12 Mar 2012 19:41:08 +0000

Those entering their fifties and perhaps looking forward to retirement are also entering the most expensive period of their lives according to a new survey. Some of the main outgoings for those in this age group include mortgage payments, University fees, weddings and property deposits. An income of at least £1,500 per month is needed to support these costs, according to the survey undertaken by Benenden Healthcare Society.

Marc Bell from Beneden said that…”…reaching 50 is traditionally supposed to be the start of a new lease of life as kids grow older and couples find more time to themselves.” He added that children were becoming increasingly more dependent on their parents financially and that debt rarely goes away. Of the 2,000 people intervied for the survey, the average mortgage payment was £354, with the average monthly food bill standing at £292. Annual spend on holidays totalled £1,254 on average. Another cost was children’s pocket money which totalled a staggering £78 per month on average.

In addition to regular outgoings, near 40% of those questioned had given a lump sum to their children, often to pay off their debts or to help with a first time buyer mortgage. It is thought one in ten of the over 50′s ends the month in deficit. A SAGA survey last year revealed the generous nature of the over 50′s age group who were dubbed the ‘generous generation’. However rising inflation, rising unemployment and lower annuity rates means this generosity will become increasingly difficult to maintain in the future.

New retirees are 22% worse off compared to four years ago

Peter — Sat, 10 Mar 2012 11:39:16 +0000

New evidence has show that those people who are about to retire will be up to 22% worse compared to those who retired four years ago. Taking an illustrative example of someone with a pension pot worth £26,000, they would today receive £440 less than they would have done back in 2008, according to the National Association of Pension Funds. The fall in income is due to record low annuity rates, which have been partly driven down by the government’s policy of Quantitative Easiing (QE), according to NAPF. And it is not just DC pension holders that have been hit by QE, companies which must pay into their final salary pension funds have had to increase contributions resulting in the collective deficit on these funds reaching £90bn. NAPF argue that the impact of QE for companies is that they will have to divert money away from jobs and investment and instead spend the money fulfilling their existing pension obligations.

Joanne Segars NAPF chief executive says there needed to be changes to the rules governing how companies cover pension deficits and warned against another possible round of QE. She added that the impact of QE could mean more final salary pension schemes closing in the private sector as they will become increasingly unaffordable for companies. One of the main aims of QE is to make so called more riskier investments seem more appealing. However a survey of fund managers showed that just 14% were likely to move away from gilts. The regulator is set to publish guidelines for trustees on how they should invest in the light in the current economic climate. In a statement the Pension Regulator said that… ”…we have committed to monitoring the ongoing effect on pension funds of the current climate, including quantitative easing — and we have emphasised the flexibility that is already available in the funding framework.”

Another point to note is that not only are today’s retirees worse off in terms of retirement income, they are also having to deal with higher inflation which means their spending power has been reduced. For example the price of domestic gas has risen by 67% in the past five years, with electricity prices climbing by 28% in the same period. Other essentials such as petrol have also seen inflation busting hikes, with the average cost per litre now standing at £1.35, whereas it was £1.04 back in February 2008.