pensions

[IR35 Avoider]

CERTAIN ! Please don't start this debate again ! I was in on the last one and I am still not convinced you can pay 95% in without some risk. Can we agree to disagree before the debate fires up again !?

That wasn't meant to be a point of contention - there are lots of more important things I wanted to convey in my post. As a PCG member I know their official advice from highly qualified advisers who've spoken to Revenue is that this is OK. I accept that you disagree.

Edit: Actually "certain" related to IR35 - there's never been any doubt that pension contributions immunise that money against IR35. The previous debate was whether they would always be allowed as an expense for calculating Corporation Tax.

[rootsnall]

That wasn't meant to be a point of contention - there are lots of more important things I wanted to convey in my post. As a PCG member I know their official advice from highly qualified advisers who've spoken to Revenue is that this is OK. I accept that you disagree.

I don't want to disagree, paying 95% for a few years would suit me fine. I'll have a look at the PCG recent debate, I haven't been there lately. Are the expert views in the forum or are they part of a guide ?

[TheOmegaMan]

6.25% for a male age 60?

The fact that you have to buy an annuity and they'll pay you the equivalent of 1/16 of your purchase price per year? If you die after two years, tough. Money all gone.

Don't you find that shocking?

Annuites offer a fairly low rate at 60 because you are expected to draw from it for a significant amount of time. In fact some people will draw that annuity for 40 years... most will draw from it for 20 years given increasing life expectancy.

You don't have to buy an annuity for an occupational pension scheme up until age 75. You can use income drawdown and take out between 0% and 120% of the annuity rate after retirement. During this period your funds are passed on should you die.

At higher ages annuity rates are much better - because we all die so there is much more cross-subsidy.

[rootsnall]

Annuites offer a fairly low rate at 60 because you are expected to draw from it for a significant amount of time. In fact some people will draw that annuity for 40 years... most will draw from it for 20 years given increasing life expectancy.

You don't have to buy an annuity for an occupational pension scheme up until age 75. You can use income drawdown and take out between 0% and 120% of the annuity rate after retirement. During this period your funds are passed on should you die.

At higher ages annuity rates are much better - because we all die so there is much more cross-subsidy.

That's my plan, drawdown only if I need the cash until 75 and then buy an annuity at that stage. Saying that they'll tinker with it so many times before I'm retired that planning now is a complete lottery. My main worry of taking the pension route is they'll have to rob the more sensible people to pay for the unwashed masses who have saved stuff all.

[TheOmegaMan]

I think it is likely they will re-enforce a minimum drawdown at some stage. In the US this kicks in at 70.5 for their 401k schemes. Atm few people take up income drawdown, but if more do then government will want that tax sooner rather than later.

[ASB]

Why do you say that annuity rates are shocking ?

Please remember in your reply that the Jabber is an actuary.

According to my quick calculations:-

Assumption:

Long gilt yield is 4.6%
Annuity Rate 6.25%

This would take 27 years to deplete the capital to nil. Given 6.25% is about the yield on a male ages 60 is 87 (say 85 to give the insurer a 10% margin) a reasonable life expectancy for a 60 year old male?

I though it was around 82, in which case the average size pot left for the insurer is 29%.

I'm not sure it's shocking, but it doesn't look particularly good value.

[Euro-commuter]

According to my quick calculations:-

Assumption:

Long gilt yield is 4.6%
Annuity Rate 6.25%

This would take 27 years to deplete the capital to nil. Given 6.25% is about the yield on a male ages 60 is 87 (say 85 to give the insurer a 10% margin) a reasonable life expectancy for a 60 year old male?

I though it was around 82, in which case the average size pot left for the insurer is 29%.

I'm not sure it's shocking, but it doesn't look particularly good value.

I am not an actuary, but I suspect you're making the worst case here: using the wrong average perhaps, and talking of a 29% pot when the insurer will only get that at the end.

But no matter, my main objection is to the compulsory nature of the annuity purchase.

[ASB]

I am not an actuary, but I suspect you're making the worst case here: using the wrong average perhaps, and talking of a 29% pot when the insurer will only get that at the end.

But no matter, my main objection is to the compulsory nature of the annuity purchase.

Given the nature of the annuity market it seems to is *should* be reasonably competitive, I suspect it is.

As you point out the average is on reflection flawed. It seems unlikely that the distribution of death is even around the average. Average life expectancys increase with age. For a given sample of 60 years olds with life expectancy of 22 years those that make it to 70 will have a life expectancy of > 12 years. I guess this does hit the provider.

Personally I'm not sure the compulsory nature is wrong. The state is nominally left to pick up the pieces if somebody runs out of cash. I do think much more flexibility is required in general.

[TheOmegaMan]

According to my quick calculations:-

Assumption:

Long gilt yield is 4.6%
Annuity Rate 6.25%

This would take 27 years to deplete the capital to nil. Given 6.25% is about the yield on a male ages 60 is 87 (say 85 to give the insurer a 10% margin) a reasonable life expectancy for a 60 year old male?

I though it was around 82, in which case the average size pot left for the insurer is 29%.

I'm not sure it's shocking, but it doesn't look particularly good value.

Yes, but there is also risk for the insurer - interest rate risk and mortality risk. In addition there is the security that income is for life no matter how long you live. No form of self-annuitisation can give that guarantee.

[ASB]

Yes, but there is also risk for the insurer - interest rate risk and mortality risk. In addition there is the security that income is for life no matter how long you live. No form of self-annuitisation can give that guarantee.

I'm not convinced about interest rate risk. Surely this is largely offset by the fact that the annuity rate is set at the outset, also the long gilts generally used to back it up are known at the same time. (The 4.6% I quoted was the redemption yield of a 30 year gilt).

I'd also be curious about mortality risk, I have no idea of the distribution of death around given life expectancy, but as life expectancy averages increas with the age of the sample group then excess longevity from a small number of individuals will I think favour the annuitants.

Although annuity rates - with much simpler calculation than the actuaries will do (they of course know what they are doing) may look a little poor value wise I suspect they are fairly finely balanced.

The point I was agreeing with was that they are clearly not shgocking value overall (apart from the guy who gets run over by a bus on his way out of the life company office).