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Annuity alternatives: 5 income solutions on the cards

Pension freedom will pave the way for a raft of new pension, annuity and drawdown products.

 

by Michelle McGagh on Jan 07, 2015 at 15:47

Annuity alternatives: 5 income solutions on the cards

Annuities with variable income depending on your lifestyle and buy-to-let pensions are just some of the new retirement offerings that could emerge following the introduction of pension freedoms in April.

Later this year, restrictions that have forced retirees to use their pension to buy an annuity - an insurance contract against living too long that pays an income for life – will be lifted, allowing everyone over the age of 55 to access their pension as cash.

There has been much excitement about the idea of a cash windfall but for retirees who do not want to suffer the potentially large tax charges of accessing their savings or fritter their pension away, they can expect to be offered a raft of more ingenious retirement products.

There will still be the choice to buy an annuity and lock in a guaranteed income. Retirees will also be able to take advantage of ‘flexible access drawdown’ or ‘uncrystallised fund pension lump sum’, where the money remains invested and an income drawn from it. You can read more about these options here: 5 ways to take your pension under the new rules

However, the pension industry is also planning new annuity-drawdown hybrid products and more tailored annuities.

Here’s what could be in store for retirees over the coming year:

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7 comments so far. Why not have your say?

Maverick

Jan 07, 2015 at 22:28

I can foresee at least two problems with a buy-to-let mortgage :

1. Find me a lender prepared to give a mortgage (of any kind) to a 55-year-old without demanding a 40+% deposit.

2. If the pensioner withdraws money from his pension fund to pay this 40+% deposit, it may well tip his annual income into the 40% income tax bracket, in which case the whole thing becomes uneconomic.

He can't buy the property through his pension fund, because residential property is still forbidden.

Finally, the buy-to-let property becomes part of his estate for Inheritance Tax purposes.

"A great deal where you get tax relief on your buy-to-let"? And the rest . . . .

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William Phillips

Jan 08, 2015 at 12:25

Consider all the people who have spent their working lifetimes living from one pay cheque to the next, getting by on overdrafts or credit card debt at huge APRs, with practically no cash savings against huge mortgage borrowing (because 'house prices can only go up').. is this army of British optimists suddenly going to turn into a model of informed sobriety when it comes to deciding what to do with pension pots?

Notwithstanding that many only saved for a pension at all because it was compulsory- when faced with this new galaxy of choice and doubtless high-cost 'products', the Government assumes that after some cursory advice they will do the right thing for them and theirs as they suddenly find themselves clutching a sizeable capital sum. Oh, and would any of you schmucks like to buy Tower Bridge as a BTL?

The stage is being set for a bigger, better orgy of mis-selling and commission carrion than anything we saw from banks and insurers in the past two decades.

We can only predict one outcome surely.

Those who screw up their retirement finances, or failed to put enough by, will expect those of us who did not make such mistakes to bail them out with tax-financed pensions and credits. Just as those who ruin their health through eating, drinking, smoking and taking drugs expect those of us who cared for ourselves to preserve their lives and wellbeing through the tax-financed NHS.

You don't get many ha'pence for taking care of your own future in The UK Republic of Welfaristan, though you get plenty of kicks for being 'mean-spirited' and lacking 'compassion' if you squeak a faint protest at being mulcted to subsidise deadbeats. Virtue has to be its own reward in a society which has institutionalised dysgenic irresponsibility.

But God help Britain when those stoical, self-reliant Chinese really get going.

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Jerry Jones

Jan 11, 2015 at 13:08

maverick:

1. Pretty much any specialist Buy-to-Let lender, such as Paragon, The Mortgage Works or Birmingham Midshires, as well as many smaller, specialist lenders like Aldermore or Shawbrook. Talk to a specialist broker.

2. Withdraw 25% tax-free plus enough in a number of years to stay below the 40% threshold. Equity in property can be written into trust, I believe, which deals with the IT problem.

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hooligan

Jan 11, 2015 at 15:10

Pomders whether the State pension will reflect Stages 1-3 or whether the Government can redraft it State pension the same way.

For William Phillips, perhaps you are right. Some people will never be able to afford a pension beyod the State pension. Optimism and pessismism does depend on whether you are pouring or drinking the glass half full (or empty).

For those of us who do try and make sure we have a self sufficient retirement, more choice at least does offer more confidence and a better life than what was before.

Personally, I am either taking drawdown, using capital when i need it and not on a regular basis and I would consider selling out the money call options against my dividend designed equities as an alternative investment strategy, just for something to tinker about with.

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Pilgrim

Jan 11, 2015 at 17:55

@William Phillips

While I am in sympathy with much that you say, your concern about those who bring on their own ill health through harmful self indulgence may be misplaced. That same harm to health also reduces their life expectancy. They are heavy consumers of health care while they are alive, but they do not live as long as those more careful of their heath. The result is that the total accumulated health care costs per individual over life will often be higher for those whose prudent behaviour delays the onset of the nearly inevitable health catastrophes to be expected in the final rundown to death!

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Pilgrim

Jan 11, 2015 at 19:00

The problem facing retirees is how to solve an indeterminate conundrum. With assets from a pension fund and other savings. How these can best be managed so as to provide comfort and safety throughout life, and very possibly to leave a useful residue by way of inheritance to family or dependents at time of death.

The difficulties to be overcome are both intrinsic, 'how long will I live?', and extrinsic, 'how will the cost of living change in future?'.

Other factors to be considered include the State Pension and how this may vary over the years (index linked for now, but will it be so indefinitely?), and any demands arising from the needs of others.

There are suggestions that the need for money may vary over time during retirement. Clearly this is so for some but for others it is an imposed condition, the result of financial constraint arising from excessive disbursement in the earlier years of retirement.

The 'how long will I live' question is unanswerable for an individual beyond saying that there is very little chance that he will survive past 105!. At any given age, the best answer that can be found is to look at life expectancy tables, such as those published by the GAD.

As a male of 69 years the GAD tables indicate that my life expectancy is about 18 years. What does this mean? Well, that it is expected that half of the cohort of those 69 years old now will be dead in 18 years time. And of course, half will survive. The GAD table includes subjects with a very wide distribution of health, and includes the obese, smokers, etc. so it is up to an individual to judge his own situation in relation to the table data.

Planning finances to exhaust money at the 'expected' life term would plainly be imprudent, there would after all be a 50% chance that the funds would be exhausted before death. An answer of sorts can be obtained by a second recourse to the tables. Assuming survival for 18 years to the age of 87 the tables then give a further expectancy of 7.4 years. OK, so from today as a starting point there is a 25% or one in four chance of surviving to the age of 94.4! On the hypothesis that the funds should provide income for at least 25 years the assets can safely be run down at a rate of 4% per annum.

This is a safe draw down rule for today. However it will be necessary to reappraise the position every few years. The safe draw-down % will increase gradually over time. Note, that the underlying funds need to have some protection against the ravages of inflation and against financial risk. The % rule should be applied to determine the maximum annual off take from the fund including both capital and any income arising from it.

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William Phillips

Jan 12, 2015 at 11:47

"your concern about those who bring on their own ill health through harmful self indulgence may be misplaced. That same harm to health also reduces their life expectancy."

But medicine is constantly inventing techniques for prolonging diseased existences. The new way of fixing the resultant financial problem is down the Dignitas road. It is no accident that the controlled media, always willing to pipe tunes for its political masters, are increasingly presenting sympathetic cases for legalised euthanasia.

The public is being softened up to accept being cajoled into death at the State's hands: something quite unthinkable (like legalised, medicalised abortion of the inconvenient) in the days when Nature took its course with less interference. In our exits and entrances we shall become the State's playthings.

The fiscal burden of preserving lives made miserable by self-inflicted harm is the tyrant's opportunity, for this is becoming intolerable to the healthy and self-reliant. A revolt like the Tea Party in the States is threatened by the operation of the Keynes-Beveridge era's institutionalised moral hazard over the last three generations: the build-up of national debt is too great for UK to carry as the tsunami of Asiatic economic compettion approaches. The age of welfare entitlement is pricing itself into eclipse.

The British Atlas has not yet shrugged, but is twitching.

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