Annuities + Prince Charles = Serious pensions troublePosted on: 01 November 2013 by Andrew Stallard
The decisions you have made on your pension could have financial consequences that will be with you for the rest of your life.
When Prince Charles starts sounding off about pensions, you can be sure of two things. One, he’s getting close to retirement age. Two, the pension situation is serious!
The Prince of Wales reaches 65 next month; the 14th of November to be precise. No retirement for him though. As next in the line to the throne, Prince Charles hasn’t even begun his proper job yet, and there’s still no sign of a start date.
As for his pension, it isn’t clear whether Charles is in a final salary or money purchase scheme, but there is little doubt that the Bank of Mum & Dad will come to his assistance if there’s a problem.
No such luck for the rest of us. Prince Charles’s predication that the next generation of pensioners would be “consigned to an extraordinary miserable future” could be frighteningly accurate.
The pension facts just don’t stack up. A typical pensioner is going to need an income of £25,200 – and they are likely to end up with £11,400. That’s less than half. Anyone turning 65 now will, on average, live another 19 years. (1)
It’s simplistic to blame the fall in annuity rates.
In the nineties, your pension pot would buy you a return of nearly 15%. Today, that return is 5.8% - and that’s an improvement on last year. To enjoy that income of 20 years ago, your pension pot needs to have grown from £100,000 to over quarter of a million. That’s assuming you get the best annuity deal on the market – there is a variation of 38% on those rates! (2)
Pensioners can’t – must not – accept the rates offered by their fund provider without exploring the market and taking specialist advice. Your pension, whether aged 20, and especially aged 60-plus, is the biggest financial decision you ever make. By the time you realise it has gone wrong, there’s no way to repair the damage and you are left scratching your head about why you made such a stupid choice 30-odd years earlier.
All those choices crystallise into one single, crucial moment with the purchase of an annuity. Get it wrong, don’t take advice, and don’t check the options and you live with the financial consequences for the rest of your life.
It’s not an easy choice and one that previous generations did not really have to face. The unsustainability of final salary schemes, especially in the private sector, means money purchase is now the norm. Those in the public sector continue to buck the trend – and we continue to pay for their final salary privileges through income tax and council tax.
The biggest irony about the current pension situation is that you spend 40 years putting money into your pension pot – and when you reach retirement age; you spend the next few years trying to avoid taking it. The trouble is the purchase of an annuity - it’s such a poor financial deal. A fund of £100,000 provides around £,3,576 a year, RPI indexed-linked and no guarantee! Small wonder, pensioners do all they can to evade the annuity route, and take advice on the “drawndown” options. (MoneySuperMarket, 2013) (3)
If you don’t touch your pension fund, it can be left to your family, free of inheritance tax. That alone motivates many to seek alternatives to annuities but careful tax planning advice still needs to be taken.
When you examine the annuity options, the key question will be one you are almost certainly going to be unable to answer. How long have I got? The unlucky few who know that answer can at least make informed financial decisions.
The world’s average age was recently calculated at 67.8 years. UK men get another 12 years and the women average 80. The best place to be born for women is Japan (86). For men, it’s Qatar, the one country where men on average live longer than women (81-79) and the controversial hosts for the 2022 FIFA World Cup. (4)
One of the worst deals for men is Libya, whose average age is 58, 16 years less than the women. The one upside of that statistic is that it removes most of the pension issues we are all facing!
The value of shares and investments can go down as well as up.
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. All information is based on our understanding of current tax practices, which are subject to change.
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