FIDDLING WITH THE ODDS

Please note that 2012 may be a good time for men in their 60s to take their annuities as some European legislation is changing the odds come the end of the year. The statistics have always shown that women, on average, live longer then men and annuity rates have reflected this. In December of this year, however, the European Court of Justice in its wisdom has dictated that both sexes must be treated equally in the matter of insurances. As regards annuities, this is likely to mean that men will get slightly worse annuities and women slightly better ones. So for those men who are in their mid to late 60s or older, it is probably a good time to get their annuity.

ANNUITY OPTIONS

The above is the simple concept. However, there are many different annuity options that are available to choose from. Husbands and wives can decide to take out an annuity that will pay as long as they both live. You can decide to take an annuity where the money paid starts lower and increases each year, or you can take a higher payment, which stays the same. Those who have been heavy smokers or have serious medical issues can get Enhanced Annuities. Those are simply higher payments taking into account the odds that such a person is not going to live as long as the average person. We will be happy to cover all of the options for you but we wanted to help you understand the basic principle that underlies what you are likely to be involved with when you cash in your Pension Box.

THE MARKET FOR ‘ANNUITIES’

When the time comes and you start looking for an ‘Annuity’, you will find that there is a marketplace for ‘Annuities’ just as there is for apples or pears. You can go out into the marketplace and look for the best deal for the money left in your Pension Box. So “How much will I get for my money?” you may well ask. The answer is, of course, it depends on what is available in the marketplace. Here it is worth looking at just how a company works out what they can offer as an ‘Annuity’. In fact, the company is taking a gamble. They know that they can invest the money you give them and it is from that investment that they will need to cover their payments to you as well as their costs and profit. The company uses its actuaries (professional gamblers basically!) to calculate the odds of how long you are going to live. That will tell them how long, on average, they are going to have to make payments to you. The actuaries use the information available which essentially gives the life expectation for a person of a given sex and age. These are the odds that they work with, along with what investment return they can be sure of over a longish period of time. So what affects the market price of ‘Annuities’? The longer we live, the longer the companies have to pay out so the less they are likely to offer. The lower the investment return they can get over the long term, once again, the less they can offer.

New “Buy Now” for your ISAs

With the beginning of the new Tax Year (2012/2013), there is the immediate opportunity for doing your new ISA savings/investment. You do not need to wait until the end of the Tax Year. In the case of a Cash ISA this gives you an extra 12 months of tax-free growth if you do it now. With a Stocks and Shares ISA you would be buying at what looks to be a low point in the Market and avoiding the end of Tax Year rush, which tends to drive up investment fund costs.

THE ‘ANNUITY’

Basically an ‘Annuity’ is a guaranteed income. When you buy an ‘Annuity’, you basically are swapping the 75% cash remaining in your pension box for an income guaranteed for life (Note: we will deal only with the guaranteed annuity for life here, but there are other varieties as well which we will be happy to discuss with you.) So the money in the Pension Box goes to the annuity company who provides you with the guarantee of an income for as long as you live. Many of you will immediately ask: “Can I trust them to pay me as they promise?” It is a good question and the answer is that Government provides a guarantee that ensures the annuity will continue to be paid even if the company concerned goes under.

SOME PENSION BASICS – THE ‘ANNUITY’

While pensions can be complex and difficult to deal with because of all of the past pension legislation and changes, it is important for everyone to have some grasp of the basic concepts. In this section we are only discussing personal pensions, i.e. not company pensions where the benefit is assessed based on years of service and salary. A personal pension can be viewed very simply as a box into which you are putting money to save until you are aged 55 plus. This box has some advantages, as the Government can also add money to the money that you put in.

Inside the box your savings are looked after for you by a pension company. The pension company finds out how you want to invest your money and will do its best to make extra value for you. If you want no risk, you can arrange to have your savings kept in a cash account. Otherwise there will be an investment risk with your savings and the value can go up and down. Over 10 years and longer the results show that generally people are better off if they take some risk with the money in their pension box.

Come age 55 the happy day arrives whereby you can dip into your pension box. That is the earliest age that you can be for the Government to let you get your hands into your pension box (with some exceptions including serious ill health). This pension box, however, generally does not let you take it all out (except for some exceptions for small pension pots for those aged 60 or over). You can get your hands on 25% of what is in the box. This is tax-free and can be used however you wish. The remaining 75% has to be used to provide an income and this is where we come up against “The Annuity!” While there are various options open to you as regards using the 75% (which we will be happy to discuss), most people will end up getting an “Annuity”. We will now seek to make the “Annuity” concept as simple as we can.

SMALL PENSION POTS

Many people have built up small pension pots from one employment or another or from one pension savings strategy to another. Up to now these were difficult to deal with at retirement because of their small size. The Government has seen some sense in this regard and now each individual aged 60 or over can take up to two small pension pots (each no more than
£2000) all as cash. 25% of the pot can be taken as tax-free cash and the remaining cash will be taxed as if it had been earned in the year that you take the money. Those of you who like solving problems will probably have immediately realised that if you had one pot worth £4,000, that you could split it in two to get the required £2000 size.