Boughtin95 Posted April 3, 2014 Share Posted April 3, 2014 Do we have any annuity experts on the site? I've looked at a number of calculators and have been astonished at how much it seems to cost to purchase an annuity providing a decent income. Can anyone confirm how much it would cost to purchase an annuity providing an after tax income of £25,000.00 per annum based upon the following criteria? a. male - Age 57 b. Annual increase in line with CPI. c. Guaranteed half pension to spouse upon death of main recipient. As far as I can see, this would appear to require a pension pot of £600k to £700k, is this correct? Quote Link to comment Share on other sites More sharing options...
crashmonitor Posted April 3, 2014 Share Posted April 3, 2014 Do we have any annuity experts on the site? I've looked at a number of calculators and have been astonished at how much it seems to cost to purchase an annuity providing a decent income. Can anyone confirm how much it would cost to purchase an annuity providing an after tax income of £25,000.00 per annum based upon the following criteria? a. male - Age 57 b. Annual increase in line with CPI. c. Guaranteed half pension to spouse upon death of main recipient. As far as I can see, this would appear to require a pension pot of £600k to £700k, is this correct? Seems a bit optimistic to me........ 3.5%. So much risk with providing index linked annuities. Also many of the so called index linked annuities have get out clauses lest we have hyper inflation. Thank God for the new legislation. Quote Link to comment Share on other sites More sharing options...
leedsproperty Posted April 3, 2014 Share Posted April 3, 2014 Obviously future returns are uncertain. But a long term return above inflation (i.e. in real terms) of around 4% has been had historically from a mix of 60% shares and the rest in bonds gilts and property I've read recently. If you want to take a bit of risk, to enable the pot to be passed to your children then perhaps its worth considering draw-down instead of an annuity. Quote Link to comment Share on other sites More sharing options...
martymcfly Posted April 3, 2014 Share Posted April 3, 2014 Do we have any annuity experts on the site? I've looked at a number of calculators and have been astonished at how much it seems to cost to purchase an annuity providing a decent income. Can anyone confirm how much it would cost to purchase an annuity providing an after tax income of £25,000.00 per annum based upon the following criteria? a. male - Age 57 b. Annual increase in line with CPI. c. Guaranteed half pension to spouse upon death of main recipient. As far as I can see, this would appear to require a pension pot of £600k to £700k, is this correct? Seems optimistic to me as well Plugging some numbers into an online comparison site such as http://pluto.moneyadviceservice.org.uk/annuities With your details, and the maximum allowed pot for the calc of £1m, the annual income is about £17k. To get an after tax income of £25k, you're probably looking at £29k income needed roughly at current tax rates. The pot needed for a £29k pension would prob be close to £1.7m!! The days of retiring @ age 57 with recent changes in estimates of life expectancy are over. QE and interest rate policy messing around with gilt yields have only made matters worse. Quote Link to comment Share on other sites More sharing options...
terryturbojr Posted April 3, 2014 Share Posted April 3, 2014 Do we have any annuity experts on the site? I've looked at a number of calculators and have been astonished at how much it seems to cost to purchase an annuity providing a decent income. Can anyone confirm how much it would cost to purchase an annuity providing an after tax income of £25,000.00 per annum based upon the following criteria? a. male - Age 57 b. Annual increase in line with CPI. c. Guaranteed half pension to spouse upon death of main recipient. As far as I can see, this would appear to require a pension pot of £600k to £700k, is this correct? Assuming you get a return of inflation in the pot, which is conservative but could happen. If you live average time, around 80, then you're looking at 23 years at 33k gross. So a total of 759k. This doesn't take into account the half for your wife. Quote Link to comment Share on other sites More sharing options...
Democorruptcy Posted April 3, 2014 Share Posted April 3, 2014 Here we go. No doubt the first of many. Quote Link to comment Share on other sites More sharing options...
katchytitle Posted April 3, 2014 Share Posted April 3, 2014 Assuming you get a return of inflation in the pot, which is conservative but could happen. If you live average time, around 80, then you're looking at 23 years at 33k gross. So a total of 759k. This doesn't take into account the half for your wife. At the rates currently, buying an annuity is insane. Draw down (where you can manage your own asset allocation) is a much better alternative. If you go down the annuity route remember to take up smoking and drinking heavily to increase your yearly payment. 40a day and regular drink can increase your annuity payment by 20% sometimes. Just stop doing it after you've got your payment. :-) Quote Link to comment Share on other sites More sharing options...
19 year mortgage 8itch Posted April 3, 2014 Share Posted April 3, 2014 Here we go. No doubt the first of many. Indeed. When will they realise you cannot expect to sit on your 'arris for the rest life and expect an above average income. Quote Link to comment Share on other sites More sharing options...
Boughtin95 Posted April 3, 2014 Author Share Posted April 3, 2014 Indeed. When will they realise you cannot expect to sit on your 'arris for the rest life and expect an above average income. If either of you had bothered to read and understand the question, you would realise that I'm merely trying to understand why it costs so much for a median income. Your childish comments make you appear a tad bitter. Personally, I think that if someone has put themselves in a position to have a £25k pension income in their mid fifties, good luck to them. Quote Link to comment Share on other sites More sharing options...
olliegog Posted April 3, 2014 Share Posted April 3, 2014 just for a real life comparison - leaving aside the bashers who seem to think the young are paying for people's individual's self funded pension I had 100K in my pot - from a [personal pension paid for by my own money over many many years in 2007 this gave me a tax free 25% and thereafter an annuity of around 4K pa gross (obviously then added to my taxable income) this is a straight annuity but split between guaranteed amount (50%) and invested amount (the remainder - which hopefully might keep pace with inflation) there is no widows/widowers pension and I have no life-threatening habits so not enhanced and not linked to CPI if I live another 12 years or so I will get back my pot - after that it is a bonus. looking at these figures it is telling how generous final salary pensions are :angry: Quote Link to comment Share on other sites More sharing options...
roblpm Posted April 3, 2014 Share Posted April 3, 2014 If no annuity I read 4% safe withdrawal rate as someone mentioned already. In the USA they seem to understand these things much better. Great calculator at: http://www.firecalc.com/ Quote Link to comment Share on other sites More sharing options...
VeryMeanReversion Posted April 3, 2014 Share Posted April 3, 2014 (edited) VMR method: 1. Drawdown from 57 to state pension age. (Pointless getting an annuity before then IMO) 2. Assume state pension at age 67. Until this point, you have got through ~ £280K for those 10 years to get a £25K net income. (Use the tax-free 25% for much of this) 3. State pension of £144 per person flat rate = £15K for a couple. Possibly a bit more if your SERPS/S2P was good. 4. Get £10k from your pension from then on, either as drawdown or annuity as you prefer. I would personally to drawdown for a few years and see how my health goes That should make the numbers you need look a lot lower. Edited April 3, 2014 by VeryMeanReversion Quote Link to comment Share on other sites More sharing options...
porca misèria Posted April 3, 2014 Share Posted April 3, 2014 Do we have any annuity experts on the site? I've looked at a number of calculators and have been astonished at how much it seems to cost to purchase an annuity providing a decent income. Can anyone confirm how much it would cost to purchase an annuity providing an after tax income of £25,000.00 per annum based upon the following criteria? a. male - Age 57 b. Annual increase in line with CPI. c. Guaranteed half pension to spouse upon death of main recipient. As far as I can see, this would appear to require a pension pot of £600k to £700k, is this correct? That's a huge pension you're expecting, especially that young. It would be more usual to reduce your costs in retirement, for example by paying a mortgage in your working life so your housing costs in retirement are low. And how old is this spouse? Your annuity provider is looking at not one but two life-expectancies. Take that pension age 57, then thirty years later marry some young girl, you + merry widow could be looking at 100 years of annuity if the smallprint goes awry. Quote Link to comment Share on other sites More sharing options...
Guest TheBlueCat Posted April 3, 2014 Share Posted April 3, 2014 As far as I can see, this would appear to require a pension pot of £600k to £700k, is this correct? Yes, that looks about right. You might be able to get a better offer by talking to a specialist broker, particularly if you have any health issues that might lead to lower life expectancy. As others have said, you might be able to do a bit better under the new rules by managing your own investment but that will be a risker approach. This isn't at all aimed at you, but it's worth repeating here. People have no real conception of how much money it'll actually cost to retire. Anyone who has access to a final salary based scheme, particularly a government one, would be insane not to join it. Quote Link to comment Share on other sites More sharing options...
Boughtin95 Posted April 3, 2014 Author Share Posted April 3, 2014 Yes, that looks about right. You might be able to get a better offer by talking to a specialist broker, particularly if you have any health issues that might lead to lower life expectancy. As others have said, you might be able to do a bit better under the new rules by managing your own investment but that will be a risker approach. This isn't at all aimed at you, but it's worth repeating here. People have no real conception of how much money it'll actually cost to retire. Anyone who has access to a final salary based scheme, particularly a government one, would be insane not to join it. Thanks for the feedback and for confirming my numbers were fairly close. I have no intention of purchasing an annuity, I have no desire or need to do so, I find it astonishing that it would take so much for a £25k pa income though, it shows how badly annuities have been affected by the financial crisis . I agree with you, anyone who has access to a salary based scheme should take advantage of it, final salary pension schemes have all but disappeared, more's the pity. Quote Link to comment Share on other sites More sharing options...
winkie Posted April 3, 2014 Share Posted April 3, 2014 Here we go. No doubt the first of many. .....how much house required to buy with debt to bring in £25k net? Quote Link to comment Share on other sites More sharing options...
Boughtin95 Posted April 3, 2014 Author Share Posted April 3, 2014 .....how much house required to buy with debt to bring in £25k net? As I understand it, none, the chap in question owns outright. I can see why you have a cat as your avatar. Quote Link to comment Share on other sites More sharing options...
winkie Posted April 3, 2014 Share Posted April 3, 2014 As I understand it, none, the chap in question owns outright. I can see why you have a cat as your avatar. Yeah but.....if I borrow more money. buy more house, I can make more money...can't I?....my annuity pension innit. Quote Link to comment Share on other sites More sharing options...
Boughtin95 Posted April 3, 2014 Author Share Posted April 3, 2014 Yeah but.....if I borrow more money. buy more house, I can make more money...can't I?....my annuity pension innit. Ah, got you. I misunderstood where you were coming from. I think you'd need a lot more than £700k worth of BTL to bring in £25k clear though and you'd be mad to sink all of your funds into an illiquid asset bought in a bubble. I'm still stunned at how much it would cost to buy a £25k pension though. Quote Link to comment Share on other sites More sharing options...
winkie Posted April 3, 2014 Share Posted April 3, 2014 Ah, got you. I misunderstood where you were coming from. I think you'd need a lot more than £700k worth of BTL to bring in £25k clear though and you'd be mad to sink all of your funds into an illiquid asset bought in a bubble. I'm still stunned at how much it would cost to buy a £25k pension though. .....some don't have to buy a pension.....it comes with the job. Quote Link to comment Share on other sites More sharing options...
Boughtin95 Posted April 3, 2014 Author Share Posted April 3, 2014 .....some don't have to buy a pension.....it comes with the job. I know, I have two just like that. Quote Link to comment Share on other sites More sharing options...
Frugal Git Posted April 3, 2014 Share Posted April 3, 2014 I'm still stunned at how much it would cost to buy a £25k pension though. Why? Look at it from the insurance companies perspective. You're asking for 25k per annum as a starting point at 57, with guaranteed index linkage, lets call it at 2.5% - low historically, but in line with the avg earnings index rather than rpi. In 25 years (at 82) you'll be on I would guess 45k p/a - and if you live longer - quite possible that will continue to compound at 2.5% p/a. Quick mental estimate, you've taken about 800k. The insurance company meanwhile has had to invest the original to ensure it could pay out yearly without depletion, and at this moment, you tell me where the safe place to get a yield of say 4.5% p/a is to manage the fund. But let's say you cark it.... Your wife, of the same age lives another 8 years to 90. She starts on 1/2 what you were on and continues to get it index linked, so sucks out ooh....another 250K? This was all mental arithmetic - but it seems pretty obvious that the fund used to buy an annuity, especially one like you said with index linkage and spousal benefit - has to be considerable to mitigate the risk from their perspective. Quote Link to comment Share on other sites More sharing options...
Boughtin95 Posted April 3, 2014 Author Share Posted April 3, 2014 Why? Look at it from the insurance companies perspective. You're asking for 25k per annum as a starting point at 57, with guaranteed index linkage, lets call it at 2.5% - low historically, but in line with the avg earnings index rather than rpi. In 25 years (at 82) you'll be on I would guess 45k p/a - and if you live longer - quite possible that will continue to compound at 2.5% p/a. Quick mental estimate, you've taken about 800k. The insurance company meanwhile has had to invest the original to ensure it could pay out yearly without depletion, and at this moment, you tell me where the safe place to get a yield of say 4.5% p/a is to manage the fund. But let's say you cark it.... Your wife, of the same age lives another 8 years to 90. She starts on 1/2 what you were on and continues to get it index linked, so sucks out ooh....another 250K? This was all mental arithmetic - but it seems pretty obvious that the fund used to buy an annuity, especially one like you said with index linkage and spousal benefit - has to be considerable to mitigate the risk from their perspective. Excellent and concise response, thank you. It also explains why final salary pension schemes are disappearing, I presume they would have to work to the same principle to pay the same amount. How long before companies providing such pensions decide to renege on their commitments? Quote Link to comment Share on other sites More sharing options...
martymcfly Posted April 3, 2014 Share Posted April 3, 2014 Excellent and concise response, thank you. It also explains why final salary pension schemes are disappearing, I presume they would have to work to the same principle to pay the same amount. How long before companies providing such pensions decide to renege on their commitments? They can't, without declaring bankruptcy. Quote Link to comment Share on other sites More sharing options...
longtomsilver2 Posted April 3, 2014 Share Posted April 3, 2014 Why? Look at it from the insurance companies perspective. You're asking for 25k per annum as a starting point at 57, with guaranteed index linkage, lets call it at 2.5% - low historically, but in line with the avg earnings index rather than rpi. In 25 years (at 82) you'll be on I would guess 45k p/a - and if you live longer - quite possible that will continue to compound at 2.5% p/a. Quick mental estimate, you've taken about 800k. The insurance company meanwhile has had to invest the original to ensure it could pay out yearly without depletion, and at this moment, you tell me where the safe place to get a yield of say 4.5% p/a is to manage the fund. But let's say you cark it.... Your wife, of the same age lives another 8 years to 90. She starts on 1/2 what you were on and continues to get it index linked, so sucks out ooh....another 250K? This was all mental arithmetic - but it seems pretty obvious that the fund used to buy an annuity, especially one like you said with index linkage and spousal benefit - has to be considerable to mitigate the risk from their perspective. Very intelligent/calculated retort but less focus on the one that got away and more on the two that fell by the wayside. That's right we can't all live to 80 or 90. You are making this sound like a zero sum game for the annuity providers that is patently not true or their stock prices wouldn't have taken such a pummelling on the recently announced changes. Good post btw Quote Link to comment Share on other sites More sharing options...
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