The Rising

Dominic Thomas
October 2023 • 3 min read

The rising

We have all been aware that prices have been rising, some rather more than the officially stated rate of inflation (are they kidding?). You are equally likely to be aware that interest rates on cash deposits have been slowly creeping up, reflecting the Bank of England lending rates. Most of the Banks and Building Societies were shamed into increasing rates by the regulator, the financial cartel has slowly limped to improvement in their offerings. At the time of writing, global equity markets are up about 7.28% over 12 months or 9.96% since the start of 2023.

This has also meant an increase in annuity rates, which are a fair bit higher than 12 months ago. Annuity rates are based on life expectancy and economic conditions, notably interest rates. For example, over the last year, according to Standard Life, annuities are up about 20%. However a little warning about the statement, there is a sense of ‘if only’ about these sorts of things…

If you were quoted for an annuity last year at age 65 (for example) you would be 66 now. As a result your annuity quote would be more anyway due to the fact that you are a year older. The older you are the better the deal, because it’s about your life expectancy (how much is left of it).

If you had bought an annuity last year at the prevailing rates, you may be a little miffed, as most of them do not increase with inflation each year. In simple terms you use a pension fund (usually) to buy a fixed income for life. This is either just in your name or with a spouse benefit (the income will continue at the same level or a lower amount each year). When the annuitant dies, generally the annuity stops, unless there is a spouse benefit or a special guarantee has been bought (so would pay the estate). You can certainly have an increasing annuity, but normally at fixed terms of 3% or 5% at the most. However these are costly and tend to be much lower, typically taking 12 years to catch up before actually paying more each month than a level annuity.

Let’s suppose you have £100,000 and are 65 – a single life, level annuity would provide about £7,462 a year (roughly). If you had been born a year earlier and turned 65 in 2022, you would have an annuity paying around £6,218 a year. This is nothing to do with investments performance, but everything to do with interest rates. Over time, that difference becomes more significant the longer you live.

The other odd thing about annuities is that if you are not in great medical shape, you may well qualify for an enhanced annuity, perhaps 30%-40% more. This is due to the expectation that your life will be shorter than average.

So had you waited you would be able to get a bigger annuity, if your health had worsened you would have a better annuity, if your spouse had died, you would get a better annuity. All pretty grim really. These are all things that we cannot predict, other than that you age. It’s also why we ask you about your health and plans. These are not insignificant issues. Let’s talk about them.

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The RisingJemima Thomas2023-12-01T12:12:27+00:00

Are Annuity Rates on the Rise?

Solomons-financial-advisor-wimbledon-blogger

Are Annuity Rates on the Rise?

Annuities may be starting to improve again. Why is this relevant to you? Well, if you plan to retire you would be wise to consider an annuity as an option for all or part of your retirement income. If you are already retired and using a Drawdown arrangement, improvement in rates may also be worth your attention.

New Rates

I recently received an email from one of the UKs largest insurance companies advising of change to their annuity rates. In general rates have begun to increase upwards. As an example, a 65 year-old with the maximum single life annuity from £100,000 would now receive £4,944 a year rather than £4,896 a year, an increase of about 1%.

How long is a lifetime of income?

Anyone wanting to build in a spouse’s pension of 50% (i.e. once the “owner” (annuitant) of the annuity dies, income would reduce to 50% for the remainder of the spouse’s life) can expect the same fund to buy an annuity of £4,420 up from £4,375. These are for level annuities (the income remains the same). You could build in a degree of inflation-linking, doing so would reduce the initial income for a joint life annuity £2,818 a year increasing by 3% each year.

The crossover point

The alarming detail is that it would take 17 years (in my example) for the inflation (rising) annuity to match the annual income of the level annuity, at which point it continues to pay out more each year (i.e. a 65-year-old would be 82). It takes a total of 30 years before the total income paid out would exceed that of the level annuity. Remember that this is for someone that started their annuity at age 65.

In truth, there are better annuity rates out in the market. You should also note that if you have any form of health problems, or smoke, you would probably qualify for an enhanced annuity. However most people would look at a pot of £100,000 and think an income of £4,420 is not terribly much and any “bells and whistles” added just make it worse. Hence pension freedoms and the abolition of the requirement to buy an annuity.

However, despite appearances annuities offer a guaranteed lifetime income, no other alternative really does that, but instead relies upon investment returns, which obviously means risk. Since pension freedoms (April 2015) many people have chosen not to buy an annuity and have taken their income from a drawdown pension instead. Unfortunately, according to recent research, many will run their pension pot dry within 12 years. Most people take too much it would seem, or at least an unsustainable amount. Almost everyone under-estimates their life expectancy, which is a crucial discussion to have and one that needs regular reassessment.

So now you know that:

There are different and better (higher) annuities available in the market
Health issues might provide a better (enhanced) annuity
Drawdown pensions carry risk
Life expectancy is a key factor
Most people are expected to run out of money
Review, review, review – especially if you have a Drawdown pension

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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Are Annuity Rates on the Rise?Dominic2023-12-01T12:18:18+00:00

The Future of Pensions

I am currently at my annual conference in Wales – the Chartered Institute for Securities and Investments (CISI) with whom the IFP – Institute of Financial Planning merged last year. Yesterday we covered a number of valuable topics, but the talk that resonated most with me was from former Pensions Minister MP Steve Webb, who talked about the future of pensions – amongst other things.

I had to admit that my BS radar is usually on hyperdrive when listening to any politician these days, which is probably a sad reflection on me, however I was very impressed by what he had to say, albeit he did not paint a terribly pleasant picture of the future. Of course, only time will tell if his predictions come about and in fairness, he was quick to remind us of the problems with predicting the future, particularly in a climate where since the last general election all of the major political parties have changed their leaders and the country has voted to leave the EU.

Book cover of Yes Minister - A Very Courageous Decision

Play it again Sam…(or Phil)

Webb was clear that changing pensions is pretty difficult and appears to be a low priority to either the Government of Civil Service. He gave an insight into the slow turning wheels of Whitehall, sounding much like an episode from Yes Minister. Given all the change that we have had (State Pension, Auto Enrolment, Pension Freedoms, Annual Allowance Taper, Lifetime Allowance…) he suspects and urges a period of quiet inaction from the Chancellor, Philip Hammond. This is particularly pertinent to those concerned about the loss or reductions of tax relief on pension contributions or changes to the tax free cash entitlement. He made the case that the public and financial planners could not plan ahead in confidence if the rules are changed every year, yet warned at Chancellors are easily tempted by ideas to collect more tax, however short-sighted.

Whilst on the subject of tax he made it clear that the Treasury are naturally inclined to taxing now rather than in the years ahead, so there is a very real pressure to take the view that tax relief reductions in the short-term outweigh the advantages of taxed incomes in the future, so by inference, a system of loss of tax relief and no taxation of pension income is a genuine prospect. He argued that this was evidenced by the Treasury’s love for ISAs and obvious contempt for pensions with the Lifetime Allowance reductions (and associated tax penalties) and the new tapered annual allowance. Personally he would scrap the LTA but retain a cap on annual pension contributions (which I certainly agree with). He did point out that of course putting trust in future Chancellors to honour a commitment not to tax pension income in the future required a high degree of faith, which deliberately provoked some mirth from the audience.

Turning to Brexit, he simply outlined his view that interest rates are likely to be very low for a long time, which would place pressure on people to look for better returns than the puny sums they achieve from their savings. He argued that this would likely lead to yet more scams as people fall for yet more illusory promises of high returns. He also warned of the impact on final salary pension schemes which, because of the assets that they hold and the way calculations are performed, would have larger deficits in their pensions (due to low interest rates) probably leading to some, or perhaps a majority of companies trimming their dividend payments.. which in turn makes the task of achieving investment income harder still.

He seemed to have little regard for our regulator of whom he said was “not fit for purpose” and thought the new LISA was perhaps the most badly constructed investment idea for years. If you follow me on social media, you will know my thoughts on this already.

So, whilst Steve Webb found a receptive audience, I was left with the sinking feeling that there was little hope for common sense to return to the Treasury… but who knows… we all get to find out in a few weeks time for the Autumn Statement.

Dominic Thomas
Solomons IFA

The Future of PensionsDominic2023-12-01T12:19:06+00:00

Pension Tax Relief Changes?

It would appear that further changes for pensions are likely. Pension tax relief has been “under review” which I always take to mean a report into the impact of a decision has been already made. At present whatever your rate of tax you receive as relief for any pension payment that you make.

As outlined within this blog before, in practice this costs HMRC a lot of money and is essentially a gift back to anyone that appears to be deemed as “rich” which as far as I can tell from Government and Opposition policy is anyone earning something between £50,000 and £1million as anyone with an income above £1m seems to largely avoid paying any tax her in the UK.

The expectation is that relief will be 33% so that a neat little explanation of tax relief can be spun by the media – 2 for 1… that is £2 from you £1 from the Government. Personally I fail to see how this is sensible as it’s an extra 13% for most people and a reduction of only 7%-12% for higher and additional rate taxpayers. It would be more sensible to have a standard rate of 25% which then at least correlates to the 25% tax free cash lump sum. 3 for 1 is just as simple to spin.

Constant Changes to Pensions

This comes on the back of other pension reforms

Pension freedom – abolition of any requirement to buy an annuity, retaining your pension as an investment portfolio.
Reduction in the Lifetime Allowance (£1m from 6th April 2016)
Online application for Lifetime Allowance Protection
Reduction in the Annual Allowance to £40,000
Annual Allowance tapering for those with income of £150,000+ from 6th April 2016 reducing the annual allowance to a maximum of £10,000.
Auto Enrolment or Workplace pensions
Changes to what constitutes a “year” input years are reverting to tax years.
Flat rate State Pension
Changes to the State Pension Age
Legislation to give HMRC the ability to take money from your bank account

Some of these changes are welcome, some are not, and many seem to be altered each tax year, making planning for the future somewhat awkward to say the very least.

Dominic Thomas
Solomons IFA

Pension Tax Relief Changes?Dominic2023-12-01T12:19:34+00:00

Pensions – more needless headaches the Lifetime Allowance

Pensions – more needless headaches

You may recall that Mr Osborne in his great wisdom has decided to reduced the current lifetime allowance even further, just to clarify – the Lifetime Allowance is the value of your pensions, either in payment or being built up. It currently stands at a figure of £1.25million but from 6th April 2016 will reduce to £1million.

It is very easy to calculate the value of your pensions, provided that they are purely investments pensions, such as personal pensions, SIPPs (self-invested personal pensions). You can also exclude the value of your State pension.

However, if you have an annuity in payment or old final salary pensions or perhaps simply a current final salary (or career average) pension (called a defined benefit pension scheme) such as the NHS or Teachers Pension, the sums are considerably more complex.

Long story short, once the value of your pensions has been calculated you may find that you have exceeded the lifetime allowance – which is reducing. So you will need to do something about this, which may well involve some uncomfortable decisions about future membership of pensions, even or perhaps especially, good ones, which is utterly daft.

Another bonkers pension policy

Yes, I did say bonkers. Despite what Mr Osborne may say about helping people to help themselves, he is actually restricting the amount that you can build in your own pension, actively discouraging saving, which does seem to be rather at odds with any historic Conservative policy in history, unless you count the lamentable decision by Norman Fowler to remove the rule that enabled employers to make membership of an occupational pension scheme a condition of employment, allowing the employee to contract out and not join the pension scheme. In fairness to Mr Osborne, with the benefit of hindsight, Mr Fowler probably takes the prize for arguably the most loopy pension decision for generations.

Mr Fowler was under the misguided impression that this brought about freedom for employees to decide if they really wanted to be in their employer’s pension. Mr Osborne can only be motivated by collecting more tax as there are 55% tax charges applied to amounts that exceed the lifetime allowance, unless you have the relevant protection, which is also not really guaranteed.

We are not talking about small sums of money here. So you need to gather your information, for two specific dates 5th April 2014 and 5th April 2016. This creates a headache for you, a massive task for me and in my opinion the lifetime allowance is one of the worst pension ideas in history – penalising both those that save and a successful investment strategy. This is a subject that I will return to frequently before 6th April 2016.

Dominic Thomas
Solomons IFA

Pensions – more needless headaches the Lifetime AllowanceDominic2023-12-01T12:19:50+00:00

Pensions: Annuities starting to improve?

Annuities starting to improve?

We appear to have witnessed a small upturn in annuity rates. In June the best open market annuity for a male aged 65, with £100,000 seeking a single life, level income with a 5 year guarantee rose to 5.35% or £5,350 in April and May the rate was 5.09%…. technically a modest increase of £260 a year in this example, but equivalent to an increase of 5.1% (Ok it is starting from a very low point).

Why?

Well, gilt yields have increased modestly too, these essentially drive annuity rates, along with mortality rates (as well as other health and geographic factors). The 15 year gilt yield bottomed at 1.76% in February this year, but has slowing started to increase. All this suggests a possible interest rate rise is probably coming.

Back in the day…

I wonder what your feelings are to this news. In October 1990 the same £100,000 for a 65-year-old male, also buying a single-life level annuity with a 5 year guarantee would have received an annuity rate of 15.64% or £15,640 a year (nearly three times as much). At the time the 15 year gilt yield was 11.74%. Gilt yields have historically always been less than annuity rates, tracking a very similar path but 2-3% less.

Of course to buy an annuity in October 1990 you would be born in 1925, the year Clara Bow starred in “The Plastic Age” and you would now be 89. Most men born in 1925 do not live to 89, (and some may have fought in WW2… just, being 20 when it ended) but for those that have survived until 2015 the average man would live another 4.32 years according to the ONS. Some will obviously live longer, some less (hence it being an average figure). If you are lucky enough to have a 15.64% annuity rate that started in October 1990 you would have already had £400,384 by the end of June 2015 from your £100,000. Living until the average 93.3 would provide a total income of £458,252… which really isn’t too bad is it.

What about inflation?

Since 1990 until the end of last year (2014) the average rate of RPI was 3.1%. As a result anyone with a level annuity has seen the effective value reduce by 3.1% a year (assuming that you believe the RPI data and buy the same goods and services – which is a significant point). Of course £15,640 today is £15,640, but if we back date this to 1990, its worth the equivalent of £32,746, in other words a little more than twice as much…. or to put it another way £15,640 is worth about half what it was worth in the space of about 25 years.

Planning your retirement income

If only life were as simple as buying the best deals. In practice planning your retirement income is a fairly involved task, there are lots of choices – loads in fact. How much income you need and your thoughts about inflation are part of the discussion. The new pension freedoms make this a more valuable discussion than simply having to buy an income and living with the consequences, the downside is that greater choice, brings greater complexity and possibility.

Dominic Thomas
Solomons IFA

Pensions: Annuities starting to improve?Dominic2023-12-01T12:40:16+00:00

Pensions: Taking Your Pension? Beware of Tax

Taking Your Pension? Beware of Tax

When the Chancellor announced the abolition of the requirement for most people to buy an annuity with their pension fund, it was somewhat unexpected. Arguably it was one of the most radical shake ups to pensions in decades. However as time progresses, the wisdom of allowing people to do whatever they want with their own money is experiencing some problems. If you are taking your pension, you need to beware of tax.

Tax

The main advantage of pensions is tax relief. At the moment (who knows if things will change in the Chancellors budget next month). Currently most investors will receive tax releif of 20% higher rate taxpayers get 40% – though the difference has to be claimed via self-assessment tax returns, not granted automatically.

Money in a pension has tax advantages

Whilst invested as a pension, the funds are free from income tax and capital gains tax – which means that they grow faster (free from tax). If you take money from a pension, (possible from age 55) 25% of the fund is tax free and the balance when taken as income (regular, ad hoc or all at once) is taxed at your highest rate of income tax. On death the new rules mean the pension fund can pass to the estate without inheritance tax.

Taking money doesn’t have to be taxing

It would appear that due presumably to a belief that pensions are “bad” some people have been rushing to withdraw their pension in entirety, which of course results in a signficant income tax bill and the realisation that once its gone… well, it’s gone. The media initially joked about people buying a Lamborghini and the prospect of access to wealth attracting the wrong sort of attention. For those that don’t spend the money all at once it means that they seek other ways to use the money to generate income to support a lifestyle…. which means investing it. See my earlier post about this.

Most alternatives are subject to tax

Investments are subject to income tax, inheritance tax and capital gains tax…. with a few exceptions such as ISAs – but with limits on the amount that can be invested each tax year. Other tax favourable investments tend to be much more “entrepreneurial” in flavour – EIS, SEIS, VCT for example, most of which carry significantly higher risk due to a small focus on shares in a single company or a very small number of companies.

So be careful – get advice, there is much to consider. Pensions aren’t “bad” in fact they can be really rather good if set up properly. The issue is really to ensure that your pension (which is just a term for income in retirement) suits your planned lifestyle….

Dominic Thomas

Pensions: Taking Your Pension? Beware of TaxDominic2023-12-01T12:40:10+00:00

Pensions: New Freedoms

Pensions Freedom

Have you heard about pensions freedom? Are you approaching retirement and thinking that this is excellent news, you can have your entire pension? Well you are right, but as ever there is a catch. You are free to self-destruct, it is your right to do so (and I’m not being patronising).

On the one hand freedom is good right? but with it comes responsibility (why do I sound like a Spiderman scriptwriter). By responsibility I mean, once you spend it, whether thats taking it as a lump sum or buyng an annuity or leaving it as a Flexible Access Drawdown pension, once it has gone – that’s it. Nothing left… except any other pension income you may have such as the State pension.

So this is all about knowing what you have and what you need. Something that no British Government has ever managed to get right for themselves, yet here we are, with new freedoms. So you have to figure out how long you will live to work out how much you can afford to take out each year. Actually rather more than that, you have to predict future inflation rates, mortality rates, investment returns and tax rates…. to name a few “elements”. Of course you could get a financial planner like me to help by doing some cashflow modelling and explaining the options and reviewing progress regularly or you could do it yourself.

Today I learned about a term called the IKEA effect. This is when we place a disproportianately high value on something that has been partially made us. Go on look it up. This is precisely what happens to DIY investors… that portfolio I built, its not bad. Actually the truth is rather different. I mean no disprect to IKEA or DIY investors. This is about a price-point in the market – what you can afford. Arguably you will have to live with both (furniture and your DIY portfolio) but your portfolio has to last your lifetime. I’m all for consumer empowerment and the removal of elist jargon and ivory towers, but information is not the same as experience or indeed knowledge. I wonder if you remember the John West tinned fish TV adverts? its the fish that John West rejects that make them the best. In other words, selection, some might call it curation – is vital.

Building the right portfolio to last for life is a fairly daunting challenge, for a few this isn’t going to be much of a problem, but for the vast majority of people it will be. Most people do not pay attention to the holdings in their ISAs or pensions. Most are in the funds or more likely single fund, that the adviser put them in when they started their pension. Little attention has been paid to assessing the level of contributions needed, frankly its more like lucky dip… and who can blame them! the jargon is a huge barrier, statements are fairly unclear and the rules keep changing, little wonder people don’t spend much time looking after one of their largest assets. Yet suddenly at the point of retirement, they are expecting to become investment experts. Whilst the Government may say that people should be trusted with their own money, thats fine if it relates to the straight-forward stuff of running a budget and basic banking, but when it comes to understanding asset allocation, volatility, sequencing risk, safe withdrawal rates, reductions in yield… well frankly its taxing even for the experts. Your pension is not a shelving unit from IKEA, its more like fitting a pace-maker, one that has to keep you going.

My advice is to get advice – don’t get sucked into short-term thinking and getting some degree of satisfaction from raiding your pension to show your displeasure with the pension company. Certainly there are better pensions, but you really need to get sensible advice to explore your options properly. You wouldn’t build a house without architectural plans (I hope)… the same is true when it comes to designing a portfolio for life.

Dominic

Pensions: New FreedomsDominic2023-12-01T12:40:08+00:00

Pension Timebomb

Ok its April 1st, but this isn’t an April Fools Day joke…. this is data from the Policy Exchange, founded in 2002 to help contribute the national thinking about society. I don’t know if it is the case, but it would appear that the Coalition Government had a look at this before deciding to introduce the pension rules that come into effect next week. However if you are someone still saving for a pension or an employer, the findings are not great reading, with both needng to contribute rather more to pensions. Clicking on the graphic should make it larger.

by policyexchange.

Dominic Thomas

Pension TimebombDominic2023-12-01T12:40:03+00:00

Pension Freedoms and a Lamborghini

I’m sure you will have come across newspaper reports that some people are concerned that the new pension freedoms, (which come into effect from 6th April 2015) are likely to mean that some people make some daft decisions about their pension pot. You have probably heard that some may go a little mad and buy a Lamborghini.

This is an issue that I have talked about with clients recently, not because they were thinking of buying a Lamborghini, but I simply wanted to explain what the nw pension rules really mean. Admittedly as I don’t own a Lamborghini I’m not that familar with their prices. I’m not an avid Top Gear fan, though I do like Grand Prix. So just by way of a guide, perhaps you may like to know the reality of using a pension to buy a Lamborghini.

Dream Car? Aventador LP 700-4

Making the wild assumption that you would want a brand new car, the cheapest model I can find available in the UK is the Aventador LP 700-4 which starts at £260,040 (I love the £40!). I’m sure the reduction in petrol prices will help, but I imagine that this is a car that with a top speed of 217mph and a combined urban/extra urban fuel consumption of 16 miles per gallon is also going to be expensive to run, let alone service.

On the Road Price

Assuming that this is an “on-the-road” price you need to write a cheque for £260,040 to the dealer from your pension. As of today a pension isn’t a bank account and does not come with a cheque book. But from April 6th you will be able take all of the money out (if you are 55 or older). The new rules allow you to take all your money out should you wish to – you don’t have to buy an annuity. However the original rules still apply, in that you can take 25% of the fund as tax free cash, the balance is deemed as income and taxed at your marginal rate of income tax (as it would be if it were an annuity). So, to buy the Aventador LP700-4 you need to pay £260,040, there are two ways that you could now achieve this.

1. Use the tax free cash – you could have a pension pot worth £1,040,160 and be able to take out 25% as tax free cash (£260,040).

2. Use the entire pension pot.You need a pension of tax free or have a pension pot worth at least £393,000. This would mean that you could take £98,250 as tax free cash and £294,750 as income (but suffer 45% income tax) leaving a net income of £162,112.50 and so have £260,362.50 to hand over the the Lamborghini dealer. Ok not all your income will be taxed at 45% – just the income over £150,000.. but most will be taxed at at least 40%, some at 20%, you would forfeit your personal allowance and in so doing pay an effective rate of tax of 60% on part of the income.

Too Fast, Too Furious… for most

It would take someone with either considerable additional resources, or perhaps a very short life expectancy to decide to buy the car with their pension… essentially costing £393,000 rather than £260,040. It may surprise you and probably alarm you to learn that the average pension pot “at retirement” is about £30,000, so for most people, they are more likely to be able to buy a model Lamborghini car which will cost between £6 and £3,654 (according to the site) or perhaps you fancy a T-shirt starting at £43.

Given that your pension, in combination with your other resources is meant to last for the rest of your life, the key is to ensure that it doesn’t run out before you do. This is precisely what we do for our clients, figure out what income you need to support your lifestyle, how much is needed, what returns required and making some assumptions (which we review together) about inflation (currently 0% here in the UK) and life expectancy. When it comes to avoiding living on the street, you really dont want a pension withdrawal strategy that is too fast and too furious.

Dominic Thomas

Pension Freedoms and a LamborghiniDominic2023-12-01T12:40:00+00:00

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