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Annuity rates have fallen again: here's why

European regulation, increasing longevity and changes to underwriting have conspired to push down retirement incomes.

 

by Michelle McGagh on Aug 22, 2012 at 16:59

Annuity rates have fallen again: here's why

The income retirees can expect to get from their pensions pot has fallen 2.6% since July as annuity rates struggle against rising longevity and tougher regulation.

An annuity is the most common way to turn a pension pot into an income when you retire. The rate – or the amount of income – you are given depends on a number of factors, including how long the annuity company expects you to live.

According to Hargreaves Lansdown rates have fallen 2.6% since July, meaning a 65-year-old man with a £100,000 pension fund will be able to buy an income of £5,591 a year compared with £5,743 at the beginning of the July.

These figures stand in stark contrast to the income that would have been received in May 2003, when a 65-year-old man with a £100,000 pension pot would have received £6,400 a year.

Unfortunately for retirees there have been 14 annuity rate cuts in July and another nine in August.

Annuity income (per annum): Click to enlarge

Hargreaves Lansdown annuity index. Male, single life, five-year guarantee, level, monthly advance, £100,000 purchase price, top provider on the HL panel.

Hargreaves Lansdown's head of pensions research Tom McPhail said there are four main factors affecting annuity rates at the moment.

‘We have been consistently warning all year that we expected annuity rates to fall and for the time being we expect this trend to continue,’ he said.

The four factors hitting pension income:

  1. More extensive use of underwriting

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72 comments so far. Why not have your say?

Jeremy Bosk

Aug 22, 2012 at 18:14

Governments and the financial services industry will rob you blind and the regulators will add crippling costs. Then they will combine to ban you from doing anything constructive to help yourself.

Avoid pensions and anything regulated. Manage your own investments. If you rely on others you will be skinned alive.

If I was young enough, I would emigrate outside the EU and learn how to invest in collectables such as stamps, art and antiques.

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Geoff James2

Aug 23, 2012 at 13:01

@Jeremey Bosk

I great when hinsight is so clear.

Notwithstanding the doom and gloom - what do you suggest now for those that are young enough for it to make a difference? Do you still recommend stamps etc, or is Olympic memorabilia OK too?

Regards

Geoff

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Dr Jimbo

Aug 23, 2012 at 13:12

The pensions industry is now completely out of kilter with people who have recently retired or rapidly approaching retirement. It is quite absurd that a £100,000 savings pot only yields £5900 per annum. Nobody could live on that.

Meanwhile the public sector is unaffected by these GAD rules and a doctor can retire on £60,000 per year - so where has his £1m savings pot come from?

The law needs radical overhaul so that the savings held for retirement can be released to the owner - with the tax removed of course by HM Tax office. This would enable retired folk to invest in an anything they wished - or move abroad with it and buy a villa in Greece for 50,000 euros!

Of equal importance is the need to prevent banks from charging 19% on overdrafts yet only offer 3% on savings. This is morally wrong and another example of the institutional corruption and greed that plagues the West today.

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Tarqs1

Aug 23, 2012 at 13:16

@Jeremy Bosk

Thank you for making me smile, it's rare that you read anything quite so amusing on these boards.

What's there to learn? All you need an in depth knowledge of Stamps, Antiques and Art, a place to store it, sufficient insurance to cover you against accidential damage or theft, a tax expert to help you with capital gains on disposal, sufficient cash in the first place, the ability to withstand a lack of liquidity and obviously when you get "turned over" with a fake and it would happen, broadshoulders because I don't think there is any Art Antiques & Stamps compensation scheme.

What utter nonsense!

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Dr Jimbo

Aug 23, 2012 at 13:18

One more thought. If Gilts fall to 0% will pensions no longer be paid at all? This crazy link illustrates that we are seeing the collapse of money as a source of value.

I would prefer my pension to be held as 1000 tonnes of top quality malting barley. At least I could then drink myself to death!

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Jeremy Bosk

Aug 23, 2012 at 14:22

Geoff James2

Steer clear of Olympic memorabilia or any other trash manufactured as a souvenir. That would include first day covers and modern coins to celebrate the coronation, royal weddings etcetera.

Rare stamps and rare coins, usually from before mechanised production in the 19th century. Autographs, letters, and books are also good investments. There are plenty of newsletters and magazines. Specialise in and learn about particular geographies and eras.

Stanley Gibbons currently has a competition to win £5,000 worth of collectables. I have just entered :-)

Tarqs1

You leave such things with the dealer which cuts the risks of burglary and environmental damage and the cost of keeping them at home.

Stanley Gibbons has been offering a service since 1856 and will store and insure your items in their vaults in Guernsey free of charge. Obviously it comes from the price you pay but still, no extra charge.

http://www.stanleygibbons.com/stanleygibbons/view/content/sg_investment_fees

If you are successful enough to make capital gains big enough to be taxable, you can afford the tax expert!

Most dealers in fine arts guarantee the quality and origin of whatever they sell

If you worry about the company going bust, you can diversify using other dealers. Avarae Global Coins and Noble Investments are the other quoted companies. Indeed, faut de mieux, I have shares in the latter.

You need rainy day money anyway. SG operate single pricing so you can always sell back to them at the current listed price.

"sufficient cash in the first place" - does that mean you know how to get shares without paying for them? It is obviously better to buy a few really high quality items than a ragbag of mediocrities. But you trade up over the years and eventually perhaps become a trend spotter and anticipate market moves.

I don't believe that learning to be a collector involves more work that stock picking.

So, smile away.

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Anonymous 1 needed this 'off the record'

Aug 23, 2012 at 14:34

Dr Jimbo was wondering where doctors' £1 million pension pot comes from? Tempting to say hard work, 50% hanging on at the edge of burn out according to current US stats, but basically they don't have a savings pot. The employee's and employer's contributions go straight back to the Treasury. Hospital doctors have pensions based on Final Salary. GPs have pensions based on total lifetime earnings dynamised each year for GP pay inflation. This worked "sensibly" until the new GP Contract in 2004 when considerable additional money was set aside for performance targets or the "QOF" mainly box ticking scheme. GPs being independent minded entrepreneurs significantly outperformed on what was expected. Whereas a GP in 2003, retiring in 2008, might expect 10 to 15 percent pay inflation on his lifetime earnings over the next 5 years the figure was actually just over 50%. A GP expecting to retire on £44K retired on £60K in rough terms. This contract risk was allegedly cleared at the very highest level of Government before the contract was signed. Margaret Beckett, who became Health Secretary in the middle of this, tried to shut the gate after the horse had bolted but the courts declared her efforts illegal. A contract is a contract.

From what I've read it's effectively been flat pay ever since then so I doubt if pensions have increased much further.

So the answer to the question posed is those generous chaps Tony and Gordon.

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Tony Peterson

Aug 23, 2012 at 14:40

As an annuity dies with the death of its beneficiary, there can be few more profitable enterprises than the provision of same.

This is why I am using every spare grand that comes my way to buy shares in high yielding annuity providers. There's a tip for you penurious wannabees.

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Maverick

Aug 23, 2012 at 14:44

Dr Jimbo - If we're going to have wet periods like the last one, you'll need a very dry store for your 1,000 tonnes of malting barley - which will be expensive to rent if you don't own it . . . . .

I've set up an online secondhand bookshop - you can pick the books up for next-to-nothing in charity shops and jumble sales. I won't give you the website address, as I can't stand people using these threads for their own personal reasons . . .

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Tarqs1

Aug 23, 2012 at 14:47

@Jeremy Bosk

I haven't got the inclination to reply to all of the nonsense, but I will reply on two points.

"Sufficent cash in the first place" No shares aren't free, £160 a month gets turned into £200 and that will purchase you some nice collectives, unlike your collectables. Does Stanley Gibbon (sic) allow regular small investments and tax relief on the contributions?

"I don't believe learning to be a collector involves anymore work than stock picking" and there I believe lies your fundemental issue. Who actually believes they can stock pick nowdays? Woodford? Perhaps one or two others, but much like becoming the "Loveyjoy of Ukraine" it's impossible for us mere mortals.

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Jeremy Bosk

Aug 23, 2012 at 15:23

Tarqs1

The first sentence of your second paragraph is gibberish. Are you talking about the 25 per cent tax relief on purchasing a private pension annuity? By collectives, do you mean collective investments such as UCITs? Or do you advise buying into a state collective farm such as can still be found in Belarus and Cuba? I don't think that is allowed. I prefer not to pay fat commissions for mediocre investment performance. But thank you for the advice.

Regarding the second sentence of your second paragraph:

For his puny puns, he will be duly punished.

You can invest small amounts whenever you like. There are discounts for regular larger amounts. If you want to know more, visit the site. There is no tax relief going in but you get the same CGT allowance for collectables as for shares. Tax considerations should not drive investment decisions. All tax relief comes at a price in reduced flexibility.

I believe that I can pick stocks. Scoff all you like.

PS You have a "fundamental issue" with spelling :-)

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Mike the red

Aug 23, 2012 at 15:24

As my retirement date of December hurtles towards me like an out of control express train I lament the day when I took out my pension savings plan. I did it in good faith being promised a pension ratio of 10:1 that would be worth at least £10k per annum based on a £100k pension pot. What a pile of steaming horse s*** that was. Latest estimate on the £100k pot is between £2.5 and £4.5k with no inflation proofing. So, we have the expert actuaries who can forecast to the nearest penny (allegedly) unable to see that the post war baby boom and the facts that show life expectancy improves with each new social development. It would appear to me that we are screwed at every level. Politicians, greedy grasping egocentrics, very few have held "proper" jobs; civil service mandarins, so called because they're orange? certainly not for their leadership skills, for civil servants read NHS, Police, teachers etc. All these clowns have protected pensions that will be linked to salaries and whilst some do pay their fair whack there are others that are taking the proverbial piss.

Meanwhile, all the wasters, charletons, scoungers, weak willed etc will get state pensions, topped up with all sorts which will put them in a stronger position than me financially. As the OP above says encourage people to invest their money wisely keeping it away from the pension industry and ignoring the siren call of the tax free allowance. I just wish I knew then what I know now.

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Tony Peterson

Aug 23, 2012 at 15:39

Jeremy,

Of course you are right, and I believe that you can pick stocks. I can too, but when I demonstrate how easy it is the malcontents bubble up to the surface demanding that we go away and count our loot.

I just feel for Mike. Meanwhile, I stick to my argument. Annuity providers are going to be coining profits in from his generation. Buy their shares. Now.

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Jeremy Bosk

Aug 23, 2012 at 15:51

Tony

As it happens I bought Chesnara this morning! I also own Hansard Global which is in a related area.

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Jonathan

Aug 23, 2012 at 16:22

The average life expectancy for men is about 83, for a 60 year old it's more as heath care is getting better and they have already made it to 60. Also, people who voluntarily buy annuities are the ones who know they have no major health risks that will mean a shorter life so their life expectancy on average is higher than the average for 60 year old's. Investments have proven to give very little real return often less than inflation and of course the annuity firm is thereto make profit so they will also want their share of the pot. So if someone expects to take their pension for 25 years it's unsurprising that you will get less than 5% income from the amount. You need a lot of money to live for 25 years and most people don't do the maths.

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Mike the red

Aug 23, 2012 at 17:48

Jonathon your points are valid but using your example and applying it to my life. If I retire in December and take 25% of my pension pot I will be left with £80k to cover the annuity. The best quote has been £4.5k per annum pension which equates to £110k (including lump sum) over my 20 years remaining. In simplistic terms I will make £10k on the balance over 20 year period. Using an annual 3% gain on the investment it will take 26 years to exhaust the £80k used to support my annuity. Meaning these parasites get to keep a lot of money unless I live far longer. So the challenge for me is to outlive my granddad who lived to be 98. Then I may win. That said, they are probably already looking at family longevity as another barrier to a decent annuity.

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Tony Peterson

Aug 23, 2012 at 18:14

Mike,

I can predict from my own experience that the 25% you take and invest on your own behalf will end up producing far more than the 75% remaining producing crap returns in your annuity. All is not (totally) lost. And you also have an incentive to outlast your ancestors. Good luck.

I'm not an expert in 'drawdown' but I think you should research other options. I would avoid an annuity at all costs in the current climate.

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Jonathan

Aug 23, 2012 at 20:02

Mike

you might not be reading the small print. You will find it is unlikely that any gain in the yearly pension will keep up with even CPI, there is also probably a clase to limit it to CPI or 3% whichever is lower. So if the BoE decide to cause some monetary inflation aka QE your annual income will be ever decreasing in real terms. But annuity firms aren't charities, they are there to make a profit, they have offices to run, bankers to pay and of course none too small bankers-bonuses to pay too.

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Jon

Aug 23, 2012 at 20:39

Dr Jimbo

The doctors' equivalent pension pots are far more than £1m. Their pensions are index linked - the examples given in the article are not. To get index linking you need to multiply the pot by around 1.85, so the doctors pots are above the maximum an individual is allowed for tax relief.

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hooligan

Aug 26, 2012 at 09:09

Tony Peterson, you raise an interesting point when you say:

"I just feel for Mike. Meanwhile, I stick to my argument. Annuity providers are going to be coining profits in from his generation. Buy their shares. Now."

and

"As an annuity dies with the death of its beneficiary, there can be few more profitable enterprises than the provision of same.This is why I am using every spare grand that comes my way to buy shares in high yielding annuity providers. There's a tip for you penurious wannabees."

I have found that investing in fraud is never a good idea. I agree with you when you say that annuity providers are coining profits. I think you should be buying low yielding annuity providers if you want to invest in this fraud.

Why is it a fraud? It is easier to illustrate the point from the chart for the 70 year old and take up the point. The estimated death date for the average of current 70 year olds is 83. That's 13 years. Dividing a pension pot of £100,000 by these 13 years is £7,700. This is not an annuity, this is simply returning the average annuitants 100,000 back to him in a straight line. Yet the annuity rate is just £5,000 (5%). There can be fewer easier to illustrate cases of fraud than this. A 70 year old is being offered the chance to lose £2,700 a year on his £100,000 for 13 years, for a total of £35,100 over his remaining life (35% of his pot). This is before any return in the unfit and rigged yielding gilt market. But even that would pay 1.7% per annum on the undrawn balance of £92,300, then 84,600. This is just a hint of the fraud being perpetrated by the annuity industry today.

So while you are right that annuity providers are coining it, it is just as significant a fraud as PPI or pensions misselling and there is a risk that there will be a regulatory enforcer or "champion" that will bring this fraud out into the open.

You certainly don't want to invest in the more honest "high yielding" annuity providers who are not maximising the fraud. Buy the bigger fraudsters who are supporting the fraud by paying lower yielding annuity rates.

Of course, you could simply provide the annuity direct via a Trust to someone you nominate and make all the money out of this fraud yourself. I am sure that a Trust could be structured with the features of an annuity and yet not be regulated as one.

You could invest the Trusts running down assets in shares with dividend yields of much more than the 1.5% to 2% or so on offer in 10 -15 year Gilts and make yourself even more money.

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df1

Aug 26, 2012 at 09:15

I have been trying to analyse this problem :-

If you wait a year because rates might rise / or as you are older you will get a slightly better deal then you get one less years income albeit what you do get is at a slightly higher rate. I have tried to do some spreadsheet estimates of the benefit in waiting but I am coming to the conclusion that the total return is similar. This is quite depressing as it implies that there is little that can be done to significantly get a better return from ones saved pension funds. I would greatly appreciate whether anybody else has done these sort of estimates. I have tried to add in factors for investment return and rising gilt yields but the effects are I would say not dramatic.

I agree with the comments above about the financial services industry robbing one blind. They are happy to take your money but when you want to know why the return is so poor its strange that they do not seem to be about. Their only legacy is the continual drip drip of their charges. Most things you would wish to do with ones pension money incurr charges and they have your money. The cost are often quite high unless you quite a lot with one provider. But it not too bright to have too much with one provider in case he goes bust - catch 22.

Its a shame that ones annuity cannot be part paid by very high grade company debt like GSK,VOD,etc. It would improve returns but it would not overcome the regulatory and increased life expectancy costs.

Some years ago I became worried about the problems of how to get ones money out of personal pensions and stopped putting in a significant amount into money purchase type contributions. Instead I built up a bit of understanding about the venture capital market (VCTs). They are not for everyone as they take a bit of comprehension but I am happy with the diverse VCT asset that I have created over several years. There are some interesting strategies possible.

Thank the Lord for the small bit of actual company pension that I have.

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Jonathan

Aug 26, 2012 at 10:12

One of the best ways to increase your income by delaying the time you take your pension is to do this with the STATE pension. This increases by 10% per year you delay it. Do the maths, it's the cheapest way increase your pension if you can afford to live without it for a few years.

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Anonymous 1 needed this 'off the record'

Aug 26, 2012 at 11:49

You can certainly increase the State pension by deferring although it takes a number of years to break even when you do start to take it. Break even point can be pushed back further if you can afford not to spend the State pension but invest it and achieve higher than inflation returns. However this misses the reason why the increase at 10% per year is so generous - the ANNUAL death rate by age and sex for 65 to 74 year olds is around 1 in 42 for men and 1 in 65 for women. (Slightly out of date stats from Oxford Uni Evidence Based Medicine team, but not too far out.) So if you are sure you will live to the break even year that's fine, but personally I took mine so I could be certain and enjoy it. The other issue is that there are also higher morbidity rates (disease, wear and tear) with age so you might want to defer for a higher pension to help achieve a better quality of lifestyle and care.

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Geoff James2

Aug 26, 2012 at 12:10

@hooligan

This is a common mistake. A 70 yr man has a much higher chance of living beyond average age simply because he has already reached 70. If you check the life tables a 70 yr old man can be expected to live to 85.

I know this changes your maths only slightly. But to this you need to add 3 further considerations

1) The chances of the 70 yr old living beyond 100 are also significantly better - this is a big risk for annuity provider.

2) Once the annuity provider in on contract they carry the risk that medical science improves life expectancy further

3) The population is largely self selecting. If you are healthy, educated and floss your teeth then you can reasonably expect to live a long time and should go for an indexed annuity - even at what appears to be a poor rate today. If you are unfit, living on takeaway dinners and have a history of heart problems then you should probably buy a flat annuity.

Whilst simply paying down a capital pool is possible, you need to also state what your plan is if you turn out to be "lucky" and live to be 100+

We have choices - In any choice there will some options that better suit a particular person and not the next. We should celebrate the fact we have choice. The fact that one option is very bad for you is just a result of your knowledge and the choices you have.

Regards

Geoffj

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hooligan

Aug 26, 2012 at 12:31

thanks Geoff, very helpful. i am assuming that there is a bell curve centring around 83-85 for deaths, but that there the curve may have a distribution cost curve that is different from the death rate (more expensive to annuity companies to provide more money for increased longevity, than it is to profit from those who die before 85 or 83).

i am some way off retirement, a decade or so, so my comment was not a personal one. I have sufficient DC and DB pensions, unless the Government defaults and the FTSE behaves like the Nikkei between 1991 and now, as it has fallen from its peak of 39,000 in 1991 to just 9,000 today for a fall of more than 75% since Japan adopted the same QE measures being pursued here. I am still trying to figure out whether a very strong currency is a corrollary of QE. The yen has strenghthened from 220 to the pound to just 120 now from 1991 to now.

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Jonathan

Aug 26, 2012 at 14:14

Anonymous 1

To see if it's good value all you need to do is look at how much it costs to get an income of 10% of the state pension if you were to buy it from an annuity provider. The basic state pension is about £5,500 pa. So deferring it for a year would cost you £5,500 but result in an additional income of £550 pa. Now how much does it cost for a 66 year old to get a £550 pa annuity? It is a figure a lot greater than £5,500.

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Maverick

Aug 26, 2012 at 21:02

Hooligan and Geoff James2 - Neither of you are quite right. I assume that as you're reading this you invest your £100,000. In that case, even if you take out the £7,700 a year, you leave the rest invested in something that beats inflation (that is, not a gilt). The law of compound interest will mean your "pot" will probably outlast you. You don't need the complication of a trust, though you could consider a portfolio of investment trust holdings.

You're only playing the annuity providers at their own game. I wouldn't call it fraud, more a con, but then annuity providers have shareholders who want a nice dividend.

If you follow this argument to its logical conclusion, you should not invest in annuity providers, as in time everyone will recognise the con for what it is, and all the annuity providers will go broke. Remember Equitable Life came within a whisker of going broke over guaranteed annuities. You only need one major annuity provider to go broke and the whole annuity edifice falls crumbling to the ground.

Draw down till you die, I say.

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Edward Burgess

Aug 27, 2012 at 03:48

The main part of each payment of annuity income should be viewed as a return of capital, because nothing remains to your estate when you die - the insurer cops it all. Based on average life expectancy the real rate of return you're getting is therefore under 1%. You could do better with almost any alternative. No-one should take an annuity unless compelled.

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hooligan

Aug 27, 2012 at 09:47

bravo edward, quite right. the annuity rate is a

rate of return of capital (your own money),

not an

income rate of return.

so a 5% annuity rate means you get your money back in 20 years and a 4% annuity rate means you get your money back in 24 years.

you can do the same by reducing your capital in 20 or 24 equal portions from a bank account with any capital balance.

any tax you pay on the repayment of this capital, is a capital transfer tax, not an income tax.

so you see the government is a willing participant in the fraud of annuities as well.

the level of gilt yields can only enhance the rate of return of your own capital. any rate of return of capital below 4or 5% (a return of your own money/capital over 20 or 25 years unitl you die) is a capital charge for storing your own capital and providing a capital drawdown facility.much akin to your bank charging you 1 or 2% per annum for lending it your money. and remeber every pound you have in your bank account is a loan to the bank, in thesame way every pound you have saved is a loan to the annuity company. the annuity company gets your capital/money in the form of an INTEREST FREE loan.

so the Govermnet is complicit in the fraud and has legislated monopoly pricing in favour of annuity companies and against owners of capital via the accumulation of savings in a pensions pot.

Now let's see how many people point out the tax free nature of saving in a Defined Contribution scheme and the 25% tax free lump sum you get out when you purchase an annuity. This was already your own money, that isnt being taxed. It does not belong to the government, it is your money, you are deferring your own consumption to relieve the burden on other tax payers later.

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Maverick

Aug 27, 2012 at 17:00

Hooligan - You, like thousands of others, are tarring the pension with the annuity brush.

Since 2006 it has not been necessary to buy an annuity to secure your pension when you reach 75.

Since 2006 you have to see pensions as a tax-efficient way of saving for your retirement. Yes, you can put £10,280 in an ISA each year, yes, you can buy a portfolio of shares, but you buy them out of taxed income. If you invest in a registered pension scheme, then you get tax relief on the way in. If your employer puts in a contribution, you don't get taxed on that either. And eventually the 25% lump sum is completely tax-free, including Inheritance Tax.

Just saying all pensions are a con and rubbish is like saying a horse is rubbish because it doesn't have wheels. You use a pension for a particular purpose. It's more of a land Rover than a Ferrari, but it does its job.

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hooligan

Aug 27, 2012 at 18:38

maverick - i agree that you can achieve tax relief on your pension contributions. My point was that when you cash your lump sum in (after paying tax on any dividends, 1% stamp duty on every share purchase and management fees of up to 4% on contributions plus 2% per annum in fees) after the 25% lump sum, you are not getting a fair shake on the purchase of an annuity. You are right. Fair pension arrangements are not a con. We do not have fair pensions.

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Jeremy Bosk

Aug 27, 2012 at 19:09

Hooligan

Only the Irish pay 1 per cent stamp duty on share purchases. In the UK it is 0.5 per cent and if you buy companies registered in the Channel Islands, Isle of man and some other places none at all.

You are generally right on excessive fees. If you think you will live a long time and remain compos mentis then learning to do your own investing is advisable. The biggest reason for avoiding pensions is that governments will betray you.

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hooligan

Aug 27, 2012 at 19:53

oops..thanks jeremy

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Anonymous 2 needed this 'off the record'

Aug 28, 2012 at 10:46

I've read a lot of these comments, and the ones I have read haven't mentioned the following:-

There is an alternative called Income Drawdown - you take the tax free cash, your remaining pot is still invested, you can take income between nothing and and maximum what you could get from an annuity, it doesn't die with you leaving your spouse with options.

But if you don't want to stay invested then the alternitive is to make your own investments, or ISA's. You do it yourself, you take the risk. I know someone that lost 75% of there investment in 2 years investing heavilly in banks / BP - generally, that does not happen if you have a diversified portfolio of funds. But also going yourself, or ignoring pensions to save for retirement, you are not getting tax relief, so will end up with a smaller pot, but more flexible in terms of accessibility.

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Jonathan

Aug 28, 2012 at 11:10

Another alternative to drawdown is to put it into a trust fund. This is where you put an amount of money say £300k into a trust fund, this is invested in bonds and gilts, they normally carry a management fee of about 1.5% per year. You can then take a fixed amount out each year (say 5%) which would give you an income of £15k. The big advantage is that when you die (if it's at least 7 years after you put the money in the trust) the money is in a trust and does not have any inheritance tax on it. So if your expected total wealth on death is much greater than £325k (the maximum amount before inheritance tax is taken) it is worth considering opening a trust so that you can obtain an income and not be subject to inheritance tax.

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Stephen Hall

Aug 28, 2012 at 11:24

Jonathan - how on earth can this be suitable? You would need to save up enough capital first to be able to do this, or it's not an option for an existing pension is it? You need to keep things in perspective as now loads of people that don't know the industry and rules well enough will think this is suitable for them, and can do it which they can't. This post is about an alternative to purchasing an annuity, and building up a pension pot. Not creating a trust once you have a large lump sum, outside of a pension saved up, and have an IHT issue.

Also, if i'm thinking correctly the type of trust this is you will be losing access to capital apart from the income. If its not that then it's a gift with reservation and wouldn't work anyway..

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Maverick

Aug 28, 2012 at 13:16

Jonathan - I spend quite a lot of my professional time as a solicitor advising clients who have been advised by an IFA to set up one of these trusts. Unless the trust is set up so that you cannot benefit from it, Stephen Hall is quite right and it will not fall outside your estate for Inheritance Tax purposes.

The only way that sort of trust works is if it is a discretionary trust, in which case you can have no control over it whatever. If HMRC smell a rat - in other words, you do really control the trust, whatever you may say - they will in all probability claim Inheritance Tax from your estate when you die, leaving your executors and the trustees of the trust with an enormously expensive job to disprove HMRC's claim.

If the managers of your trust fund are charging you 1.5% a year for managing a few bonds and gilts, you've been done, mate . . . . .

I would advise you to find a good private-client tax solicitor and get a few hundred pounds' worth of advice. It may save your executors having to pay £100,000 in Inheritance Tax.

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Tony Peterson

Aug 28, 2012 at 13:49

The esoteric debates above cannot disguise the main disadvantage about taking the "free tax money" bribe towards saving for a pension.

None of you know what horrors future governments will perpetrate upon savers.

You have to realise that once the tax bribe is taken you have lost control of all or part of your own contributions.

I'm in my 75th year. I would be better off today if I had ignored the "free money" tax bribe. I can prove it. I suspect that many of you will be saying the same thing when you reach my age.

But there appear to be few prepared to learn the lessons of history. Thucydides points out that young Athenians were also prepared to ignore them. And died young as a result.

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Stephen Hall

Aug 28, 2012 at 14:05

Tony, I see what you are saying, but don't agree with it.

If you save into EXACTLY the same funds in a Pension, as opposed to maybe an ISA, Investment Bond or Oeic, you would have a bigger fund value in a pension. Mathmatical fact, end of.

Equally, most people have pensions that have come partly through employer contributions, plus there own. Suicide if people do not accept this employer freebie, and also pay into it themselves AND get tax relief on what they put in.

And for most, being 'tied up' is a good thing. Having uncontrolled access like you do with other investments is not good.Too easy to dip into casually, that will have massive effects on the values when retired.

One of only a very few scenarios I think pensions may not be the best is for a basic rate taxpayer that has NO access to a company pension scheme. An ISA could be viewed to be better with 100% access to capital, can take tax efficient income, but albeit no tax relief so will be worth less than pension, but will grow just as tax efficiently, but still a temptation to dip into early.

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Jeremy Bosk

Aug 28, 2012 at 14:15

Stephen Hall

Optimism - the doctrine or belief that everything is beautiful, including what is ugly. (Pensions).

Ambrose Bierce

Read more at http://www.brainyquote.com/quotes/keywords/optimism.html#GpegTyG7Wc1mIfYg.99

Those who do not learn from history are doomed to repeat it. (You).

The only thing anybody ever learns from history is that nobody ever learns from history. (Tony and me).

Before someone misquotes Henry Ford, the correct version is:

History, as it is taught in our schools, is bunk.

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Chops

Aug 28, 2012 at 15:16

Stephen, I'll spell it out for you. What Tony and Jeremy are trying to tell you is that all that free money, IT AINT REALLY YOURS. That tax relief, it's a gift from the government... and the government can make you do all kinds of unsavoury things with it if they want to (imagine being forced to lend it back to them - i.e. buy GILTS!!). Or they might even decide they want to take it back (for a recent example look at Hungary)..

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Anonymous 2 needed this 'off the record'

Aug 28, 2012 at 15:30

Stephen, I see what you are saying - and clearly you are in the industry and likely to know more than most people on here the advantages and disadvantages of any savings we do. I included am sceptical of pensions, don't have access to a company scheme, am a basic rate taxpayer, and own other property that I consider my 'pension', thus I will never invest in a pension, but definately would if/when I become higher rate tax payer, as quite frankly I think you would be thick not too.

Think a few others are slightly irrational though, and too sceptical, including Chops, I know what happened in Hungary and you really need to do more in depth reading on the subject, and i'm sure others here have commented that you DON'T need to buy an annuity, you can invest in income drawdown? Does that have gilts in? im sure those things are linked to equities not gilts arent they?

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Tony Peterson

Aug 28, 2012 at 16:44

The real outrage in Stephen Hall's post is not his functional illiteracy ("there" when he meant "their", "mathmatical "when he meant "mathematical") but his underlying premise (he'll probably need a dictionary to look that up).

With what bare faced effrontery does he assert that I should have my own access to my own taxed earnings controlled by others. By whom might I ask? By him? By governments? By financial services providers?

Being "tied up" might seem a good thing if you are a masochist. I am not such.

What ignorance and cheek he has.

I am not laying down general rules. I am simply making a mathematically justifiable assertion that I would, in my retirement, be a rather richer man if I had never succumbed to taking the tax bribe. I would urge others to avoid making the same mistake.

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Stephen Hall

Aug 28, 2012 at 17:06

Ha ha Tony, thanks for the very well thought out reply, you must have enjoyed showing your superior spelling ability.

Must have touched a raw nerve though me not using a spell check then? Yes, i'm not great at spelling, and clearly you are not great at planning tax efficiently for your retirement, or you wouldn't be on these boards at age 74 giving random comments without anything to back it up by. Words are meaningless without anything to justify what you have written.

Did you know everyone is born a genius, but if you told a fish to constantly climb a tree it would live it's life thinking it was stupid?

And I haven't spell checked this comment either, but really don't care.

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Tony Peterson

Aug 28, 2012 at 17:13

Stephen Hall

Drivel is not a defence.

So if I come on to these threads hoping to give useful advice to younger people like yourself, I have to be a failure. What are you worth, you arrogant little creep?

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Stephen Hall

Aug 28, 2012 at 17:28

Likely less than you with you being 50 years older than me. Must be something you are really really proud of though - well done on your wealth acheivement, you must love it when you can brag on here what you are worth.

And just a friendly comment. When you give advice, actually give it, rather than quote some historic dribble. I'm sure whatever you did when your worked to create your enormous wealth, you did by backing up what you said and promised.

So, do enlighten us on what we should all be doing for our retirement then, as clearly everyone should completely ignore saving into a pension as the government is out to con us all sometime in the future.

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Tony Peterson

Aug 28, 2012 at 17:48

Who said I was bragging about what I was worth?

Who labelled me a failure?

But in spite of your offensive and inaccurate posts I will give you a helping hand. I am a kindly soul really. One day (unless my curse has worked and you die next year) you will come to retirement age. It would be a big help for you when that happens if you own enough shares in your water company to pay your water rates out of its dividends, if your investments in electricity and gas companies pays for all your energy bills , if your supermarket shares pay for your food bills, and your oil shares pays for your road transport costs. If you haven't done those things by the time you have retired then you will be a failure of the sort you seem to think I am.

Pensions are crap. Income producing assets are what matter when you get older.

You cannot have it both ways, Stephen. Am I to be pitied? Or admired?

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Stephen Hall

Aug 28, 2012 at 18:32

Thankyou, at last some decent actual content, and to some extent I actually agree with you (why you couldn't have just said this to start with I have no idea).

Now, if I said I had a SIPP, hold similar shares, but I can buy £1 of shares for 80p, receive a further 20% tax relief with tax return, so effectively costing 60p to buy £1 share, and then, in many years time, be able to take back a further 25% as tax free cash from the inflated value assuming its grown (let's say the £1 has grown to £2 with div's and growth over 30 years that's being conservative), so 50p cash. I now have a £1.50 value and it cost me, effectively 60p - 50p = 10p. That's 1500% return, no CGT on disposal, no higher rate div tax, no IHT implications if I die before retirement.

Non pension same scenario.

You pay £1 to buy £1 share.

It's worth £2 in retirement, and cost you £1.

100% return.

You die in meantime = IHT implications.

You decide to sell some= CGT implications.

You could be a higher rate taxpayer whilst accumulating = higher rate div tax.

Those sums, although of course just made up, the maths are there. And the tax relief, with tax free cash make it impossible to ignore which is why the cleverest people in this country who are HRT payers do not ignore pensions, so much so that the government has placed a cap on the lifetime value to £1.5m to cap tax relief given. Actuaries are usually the biggest advocates and they are not stupid.

Now I'm bored. Speaking to a brick wall whilst trying to control my 4 yr old son is not fun.

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Jeremy Bosk

Aug 28, 2012 at 18:33

Tony

Some of the posters on these boards are living proof that "Invasion of the Body Snatchers", was not as widely assumed a work of fiction but a documentary. The arrogant little creep is clearly from another planet.

Ignore him. Do as I say, not as I do :-)

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Tony Peterson

Aug 28, 2012 at 18:40

Jeremy,

It is interesting isn't it that some of these arrogant twerps rely on a spell checker.

In my day an educated brain is what mattered.

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Tony Peterson

Aug 28, 2012 at 18:51

Stephen Hall,

If you knew anything about mathematics (which I doubt) you would know that the "=" sign is a shorthand for "is".

Now that you know this I suggest you re-read the drivel you wrote at 18.32 reading your equal sign for what it means.

And why I wonder have you not had the guts to answer my last question to you??

Jeremy is right. You are not worth arguing with. You need to look up a dictionary to find out the meaning os "assets" and "ownership".

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Stephen Hall

Aug 28, 2012 at 18:54

Ha ha. Brilliant.

So first 'I am wealthier than you' and now 'I am better educated'. Are we now going to name drop our schools and uni's?

Not that I am not educated, but I also believe its not what you have got, but what you do with what you have got that counts.

Jeremy, welcome to the conversation. Do you have anything constructive to add, or just poking around for a cheap shot? Berk.

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Tony Peterson

Aug 28, 2012 at 19:14

Stephen,

And what you do with your education (for what it is worth) is to try to trick the populace into taking a tax bribe to surrender control of their assets to the distinctly pongy financial services "industry".

You won't answer my questions.

]

I think that you are beneath contempt. Get a real job making things and not telling apparently persuasive lies that you have been coached to make.

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Jeremy Bosk

Aug 28, 2012 at 19:29

Stephen

All that needs to be said has already been said by myself and others earlier in the thread. Now I am just taking cheap shots. I know I should not mock the afflicted but you make it so easy.

On the subject of spelling, if you don't like being mocked, one of the best ways to improve is by reading good books, mainly those written before 1950. I remember being laughed as a seven year old and did something about it.

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Stephen Hall

Aug 28, 2012 at 19:35

I have clearly annoyed you. Fair enough, take a deep breath, open another bottle of verve, sit in your west wing conservatory, and stare at your land toasting how much wealth you have amassed, and the education you have recieved, but mostly how you have been having banter with a mere 25 year old, 50 yrs your junior, and picking on his English.

Incidentally why do you think I'm in the industry? I am not an adviser, I'm a junior actuary. I work with numbers, and know what formulae makes better sense, and what will work and be profitable and what will not. I back up my judgements with proof,maths does not lie.

Now stop this nonsense, it's getting late, and I can sense your blood pressure is becoming a tad critical. I'm sure you and I have a lot of better things to do.

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Tony Peterson

Aug 28, 2012 at 19:35

Jeremy,

I agree we should take no notice of that offensive little Stephen twerp.

Disrespectful little kid isn't he?

By the way I have noted, gratefully, your mention of Chesnara and am doing some research. Thanks.

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Stephen Hall

Aug 28, 2012 at 19:36

Very good Jeremy, thankyou very much for your advice, very very much appreciated.

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Tony Peterson

Aug 28, 2012 at 19:44

OK, Stephen. Can you explain to me (as a mathematician of course) why Euler's relation for the case theta=pi suggests that our whole discussion is probably illusory?

And if you are such a sharp numbers' man can you explain why you have misused the "='"sign like an insurance salesman at a confidence-trickery symposium.

And do you mean "Veuve" (widow) as in the Cliquot person? "verve"???

You know we senior citizens have to put up with plenty of ignorant con-men.

Get your act together man. And answer my question.

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Stephen Hall

Aug 28, 2012 at 19:58

You win. Everything you said has been spot on, everything you have done has been correct, and the total opposite from me.

I am amazed by your stature, your views, your language, your education and your wisdom. And am sat here wishing I did not make a fool of myself winding you up.

Your family ate so lucky to have you to pass to them some wisdom. You have the luckiest great great grandchildren in the world.

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Stephen Hall

Aug 28, 2012 at 19:59

And yes, I made spelling mistakes last message. This bloody iPhone is getting on my nerves now. But I am a spelling thicko.

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Tony Peterson

Aug 28, 2012 at 20:37

Stephen, my friend,

Are you relying on sarcasm now?

Perhaps we should call a truce.

Kind wishes.

Tony.

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Tony Peterson

Aug 29, 2012 at 10:57

Stephen

I threw some hurtful comments in your direction yesterday - I'd like to withdraw them and apologise. I don't blame you for getting sarcastic with me.

The thing is (it should be obvious) I get very angry on behalf of people coming up to retirement age now who have been right royally stuffed by the policies of successive governments, the Bank of England and Quantitative Easing, by the fees and charges of the financial services industry, and by the looming spectre of uncontrollable inflation.

If it is any consolation I get equally angry about how your generation was made to pay for an education such as our lot got for free, and has to start working life burdened by debt..

Best wishes to you in your career.

Tony

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dd

Aug 29, 2012 at 11:10

"like". So do I (second and third paragraphs).

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Jeremy Bosk

Aug 29, 2012 at 11:34

Stephen

Please also accept my apologies. Similar causes.

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Dave Hill

Sep 17, 2012 at 17:57

Pensions to me are worth every penny. Take my position, say I invest £100 and my employer invests £100. My £100 less 40% tax relief has actually cost me £60, so I have £200 invested for £60. When I retired I took 25% of £200 as a tax free lump sum (£50), so an annuity of £160 has only cost me £10. I then took this to increase by 5% every year, as my family have a history of long life. I expect to make money from these annuity companies.

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Tony Peterson

Sep 17, 2012 at 18:38

Dave

An annuity is the income you purchase with your pension savings. You'd be lucky if for every £160 you have in your fund you get an income of 50p a month for life after tax. Provided of course your fund manager hasn't managed to lose a fair bit of each original £160 in charges and stock market losses (ask some recent retirees how well their fund managers have done!)

If you have the misfortune to die after a few months, the annuity provider gets the balance of your savings. So you'll have to be lucky with your life expectancy. You should break even after about 25 years. I doubt whether that 50p will buy as much then as now.

I expect to make money out of you and others who swallow the lie about free money so I am buying shares in annuity providers.

Good luck with your cunning plan.

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Maverick

Sep 17, 2012 at 23:21

Tony Peterson - Did you hear that Aviva pulled out of the bulk annuity market (which is where the real annuity money is) in July? Now why would they have done that? And is it just a coincidence that their share price has risen 34% since July?

Did they perhaps realise, as the first of many, that annuities are becoming too expensive for punters to stomach, so individuals will be drawing down and employers will just pay pensions out of their pension fund? They also realise that the longevity graph shows no sign of tailing off - it has been a straight line since 1850.

If I were you I wouldn't be buying shares in annuity providers. They have no future.

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Jeremy Bosk

Sep 18, 2012 at 00:14

Good points Maverick.

But the present ridiculously low interest rates will not last. Inflation will, eventually, take off again and investors will not agree to lend to governments at a loss for the indefinite future.

Employers do not want the bother and the open ended liabilities involved in managing their own pension schemes.

Longevity will not increase for ever. Each new medical advance costs more and more money. Only the very rich will be able to afford the best care. The rest of us will be faced with cash limited state funded care. The postcode lottery but worse is the future.

A few will have the luck, or to an extent the self discipline, to reach a healthy old age. But most will linger in misery until the clamour for voluntary euthanasia - or free and unlimited heroin supplies - will be irresistible.

A further point is that the experience of the UK is not replicated in all countries. There will be much shorter lifespans in most of the world for generations to come. The middle classes in those other countries will have a different experience and be willing customers for annuities and a great many other financial products.

UK expertise in fleecing customers will be readily exportable :-)

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Jeremy Bosk

Sep 18, 2012 at 00:21

PS

Before writing the above I was listening to Monday's lunchtime concert on Radio 3. It was all about the contemplation of death and strangely uplifting. Brahms and Liszt - the music, not me:

http://www.bbc.co.uk/iplayer/episode/b01mnx01/Radio_3_Lunchtime_Concert_Henk_Neven/

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Jeremy Bosk

Sep 18, 2012 at 00:43

PPS

This is the same story from an American angle. I believe the issues are very similar but the level of state provision is even more rudimentary and the level of deprivation among the poor is much worse.

http://www.democracyjournal.org/26/the-long-term-is-now.php

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Tony Peterson

Sep 18, 2012 at 07:52

Maverick

My answer to your first question is "yes", to the second," most probably; there were many factors causing the dip in the Aviva share price".

You are not me. Nor can either of us be certain about the future.

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Jeremy Bosk

Sep 18, 2012 at 09:36

Here is an Aviva press release on the ageing workforce which has some useful information:

http://www.aviva.com/media/news/item/uk-ageing-workforce-health-issues-to-impact-uk-business-16996/

Aviva seems to be in cost cutting and retrenchment mood. Large scale redundancies were (12 per cent) announced in August. It is leaving its China joint venture after five years effort to open the market. S&P downgraded Aviva's credit rating in August because of the risks inherent in its strategic review. The bulk annuities business accounts for most of Aviva's presence in the USA which for most financial companies is a strategically important market. Its US business' goodwill was written down by almost half and the resale value is estimated by analysts to be around half what was originally paid. It has also left Taiwan and is short of a CEO. So there are plenty of reasons for the share price fall.

Aviva has been seriously under-performing the FTSE 350 Life Assurance Sector since July 2011. That is by almost 50 per cent.So recent events have merely accelerated the trend.

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