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.

BACK TO ALL BLOGS

The RisingJemima Thomas2025-01-21T15:49:31+00:00

HOW MUCH FOR A HAPPY RETIREMENT?

TODAY’S BLOG

HOW MUCH FOR A HAPPY RETIREMENT?

Doubtless your will have heard of Which? Magazine. They conducted a survey recently in an attempt to understand how much is really enough for people to have a comfortable retirement. They concluded that a two-person household needs an average annual income of £26,000 for a comfortable retirement.

However you have coped with the pandemic, many people have not been able to spend money in the way they normally would. Many have saved the sums that would have been spent on holidays, travel, commuting, work clothes, weekday lunches, meals out and so on. This has given many of us the opportunity to pause for thought and reflect on how much we spend and the lifestyles we lead.

Some people have elected to retire earlier than they had planned, some have had this forced upon them. In practice, the warning signs for higher unemployment have been around for some time. We shall all begin to see the reality of things once the lockdown ends properly and the furlough system comes to an end. I do not see this going well. I implied, no… I stated that the Budget in March worked on the assumption of unemployment rising by 500,000 over the next 2 years with the largest increase in the current 2021/22 tax year.

£26,000 OR £19,000

Anyway, many have been giving thought to how much income they are likely to need when they stop earning. In February, Which? asked around 7,000 retirees about their spending.

The findings can be used as a guide to how much people are likely to spend and how much they might need to save, factoring in the state pension and tax bills. Couples need a pot of around £155,000 alongside their state pension to produce the annual income for a comfortable retirement of £26,000 via pension drawdown – or just over £265,000 through a joint-life annuity. Two-person households would need around £442,000 in a drawdown plan to fund the luxury retirement target (£41,000 per year) – or £589,000 if they’ve taken the full 25% tax-free lump sum available at the outset. If you opt for the guaranteed income provided by a joint-life annuity, you’ll require an initial fund of around £757,000.

For single-person households, achieving a comfortable retirement would mean a pot of around £192,290 alongside the state pension to get to an annual income of £19,000 via pension drawdown, or £305,710 through an annuity. For a retirement at the ‘essential’ level, single-person households would need £77,350 in a pension drawdown or £123,365 to buy an annuity plan to meet an annual target income of £13,000. A couple receiving the current average amount of £155 each per week will get just over £16,000 a year to add to private pensions. Pension drawdown figures are based on the savers withdrawing all of their income over 20 years from the age of 65, with investment growth of 3%, inflation at 1% and charges levied at 0.75%.

TWADDLE – THAT THING ABOUT ASSUMPTIONS

So let me respond by clearly saying “twaddle!” but it’s a helpful guide.That is all it is, there are huge holes in the assumptions and thinking, for starters, assuming a 2 decade retirement. Life rarely happens so “neatly”.

Over the years our processes have evolved with the technology that is available. We stress test your financial plan each week. Considering the likelihood of your life expectancy to the tenth percentile… which means the 1 in 10 chance you live a really long time. We consider sustainable income levels that fluctuate with inflation and changing investment returns based upon historical facts rather than regulatory unicorn utopias.

In any event, why would you care about a survey where your lifestyle is dictated? Surely your financial plan should be about protecting and ensuring that your current lifestyle endures as long as you do…. Or do you want less?

That’s why it is important, no – why its vital to have your own plan, based on sensible assumptions that we review together. Unless you have some mind-blowing news for me, you get one life and the clock is ticking. So have your own plan, know what you want and check with us that you are on track.

Need help? Know someone that does? get in touch... share the truth. It won’t hurt.

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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Solomon’s Independent Financial Advisers
The Old Mill Cobham Park Road, COBHAM Surrey, KT11 3NE

Email – info@solomonsifa.co.uk
Call – 020 8542 8084

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PRIVACY POLICY | DATA PROTECTION

GET IN TOUCH

Solomon’s Independent Financial Advisers
The Old Mill Cobham Park Road, COBHAM Surrey, KT11 3NE

Email – info@solomonsifa.co.uk Call – 020 8542 8084

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Take Survey

PRIVACY POLICY | DATA PROTECTION

HOW MUCH FOR A HAPPY RETIREMENT?Dominic2023-12-01T12:13:06+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

Email me to get in touch

Are Annuity Rates on the Rise?Dominic2025-01-21T15:50:47+00:00

Taxing Reforms for Pensions

Taxing reforms for pensions

There has been considerable “chatter” about the prospect of pensions being reformed even further. In particular, the tax of pensions is very much up for debate, making the prospect of tax reforms for pensions a genuine possibility.

In brief the Chancellor has already made huge changes to the pension system, enabling a pension to be taken as a lump sum or as income without any requirement to buy an annuity. In addition, a pension can now be easily passed on to beneficiaries of your estate, rather than ceasing when you do.

Tax Overpayments

The new freedoms have already and will continue to mean that some people don’t do their sums properly and end up paying too much tax – unnecessarily, which of course is a good thing if you run HM Treasury… every little helps and all that.

In very simple terms, most people will currently find that whatever the size of their pension pot, they can take 25% of it as tax-free cash (these days “we” call it a pension commencement lump sum – or PCLS). The rest is taxed as income.

Reforming tax relief

At the moment, anyone that pays into a pension gets tax relief – either at 20%, 40% or even 45% depending on your rate of tax. Everyone gets 20% (from age 0 to 75). So an investment of £1000 actually costs £800 if you are a nil rate or basic rate taxpayer. If you pay more than 20% tax, you get to claim the balance back via your tax returns.

The Chancellor is reviewing this, because it costs the country a lot of money. The main problem being that employers make most of pension contributions each year and do so in part because it is treated as a deductible cost. If this were considerably altered, then most employers are likely to reduce or even stop (bar the minimum requirements of auto enrolment) their contributions. This would result in smaller pensions in retirement…

So he could simply reduce tax relief to a lower amount, in essence he has done this already for anyone earning over £150,00, who have their annual allowance restricted to just £10,000 (less than an ISA) if they earn over £250,000.

Tax relief provided in 2013/14 amounted to £34.3bn, whereas the tax on pensions generated £13.1bn a “cost” to the UK of £21.2bn. Most of which (2/3rds) is reclaimed by higher rate taxpayers… those paying 40% or more.

Shrinking the Pot

He has also reduced the amount that can be held in a pension (the Lifetime Allowance) which is set to reduce again from £1.25m to £1m next April. Anything above this will be subject to an excess tax charge of 55% as things stand at present. That’s what I call easy money for the Treasury and there isn’t that much that you can do about it, other than applying for protection where relevant.

Changing the Sweetener

Another option would be to make pensions tax-free in retirement instead of taxable. Whilst this sounds all well and good, the reality is that who would honestly trust any future Government not to change the rules later, when they realise that they need the income to be taxed.

Simplicity Seems Dead

I am of the opinion that pensions are going to change, how much and when, we simply do not know. However the Government wants to be seen not to help the “rich” which seems to include people paying 40% tax and everyone paying 45% tax. It would include anyone in the State Sector that has built up a long career – doctors, teachers, police, civil servants – all of whom seem to be the current “cat to kick”. It certainly includes anyone that has pension funds worth £1m or more. Though I would argue that £1m in a pension pot isn’t that huge (yes I know its relative) but in practice that provides at £40,000 a year income… not enough to pay higher rate tax. The worst case to my mind would be to create a “before and after” system – which we have had before, which only makes life more complicated.

If I were Chancellor?

People need an incentive to save for the long-term. I would abolish the Lifetime Allowance making all current and previous protections irrelevant. I would restrict tax relief to a % of salary, perhaps providing it directly as a 5% tax cut, say 20% tax becoming 15% if payments are made to a pension. That way HM Treasury collect taxes, people are incentivized to save and earn. I would scrap rules that enable people to pay into pensions for children, which is essentially something that only the wealthy can do, so that pensions are only for those aged 18. However I would continue to tax pension income as income…

Sadly, for younger generations the prospects of good pensions looks fragile… of course there is the prospect of the solution as outlined in Logan’s Run….. there’s just one catch..

Dominic Thomas
Solomons IFA

Taxing Reforms for PensionsDominic2023-12-01T12:20:08+00:00

Pensions: Are you an Equitable Life policyholder?

Are you an Equitable Life policyholder?

Protest by EMAG October 2012

One of the larger financial messes in the last 20 years has been the failure of Equitable Life. This was a company that essentially said they didn’t deal with “middlemen” (meaning IFAs) which in practice enabled them to also say that they did not pay commission to independent financial advisers, so despite being nothing more than a product manufacturer, managed to persuade many people that this was somehow better than an IFA being able to select from the entire market and select an appropriate arrangement. As a mutual society, they could also claim not to have shareholders (who require returns). Of course in practice, like any organisation, mutual or Plc, they have operating costs – their staff and advisers who sold, sorry “arranged” policies. It was evident to some in the mid-1990’s that Equitable simply wasn’t a sustainable business. As you may imagine there were not many IFAs that couldn’t control the sniggers once Equitable was forced to close to new business in December 2000. As yet I haven’t met a single adviser that doesn’t believe that the demise of Equitable Life has had a significant impact on the degree of mistrust of financial institutions. This seems to have been compounded by the delays in appropriate compensation to policyholders. Despite failure, the company survives to service its estimated 500,000 policyholders with around £8bn of funds being managed (Equitable has been around for 253 years).

The Big Broken Promise

However the demise was nothing to do with product charges, commission (or lack of it). In practice it was triggered by failing to keep a simple but expensive promise of guaranteed annuity rates, on which it reneged and was subsequently brought to book, which then resulted in the collapse as the annuity rates were rather more than “over generous” at the time. Anyway, long sad story short, the time to apply for compensation due to the “government maladministration which ocurred in the the regulation of Equitable Life” which was established in 2010 is drawing to a close. Despite paying very large sums, there are still many people that haven’t claimed and should do so as a matter of priority. This is relevant to people that bought policies between 1992 and the end of 2000 when Equitable closed. Call the helpline on 0300 0200 150 and checkout the supporting website. Also dont forget the EMAG site as well.

Space travel has significant risks

Looking at old Equitable adverts now is a reminder that assurances about the future were somewhat misplaced. Saying something with confidence does not make it true. Even this 1998 advert with Buzz Aldrin suggests that retirement activities might include a space trip by 2028… well who knows, but certainly the belief that you can get something for nothing is definitely thinking from a different planet and those policyholders that have not yet had compensation, probably feel that their pension shouldn’t really be rocket science, but something much more down to earth.

Dominic Thomas

Pensions: Are you an Equitable Life policyholder?Dominic2023-12-01T12:40:12+00:00

Dispatches: How to Blow Your Pension

Last night Channel 4 showed a 30 minute programme called “How to Blow Your Pension”. The premise being that the new pension rules might result in thousands of “pensioners” cashing in their pension pots, blowing the lot only to run out of money. You can see the show on the 4OD website should you wish to. The intention was good, but the execution rather miserable and once again missing the opportunity to educate people and whilst Michael Buerk had a good reputation as a BBC newsreader, clearly he doesn’t appreciate that a document from a pension provider is not actually advice – but information about options. Frankly it isn’t that much of a jungle out there, but you will need proper advice, this is not the time to become a DIY internet “expert” it has to work and last. Just because someone has teeth that they care for, doesn’t mean that they should do their own dentistry. Just because you earn, handle and spend money does not make you best placed to do a proper job of planning and generating income for the rest of your life… So I thought I’d have a go at explaining the issues.

New Pension Rules – Simple

Pension rules are changing, from April 6th 2015 anyone aged 55 will be able to access their entire investment based pension pot should they wish to. There will be no compulsion to buy an annuity (an income for life). The principles have not changed – in that 25% of the pot is treated as tax free and the remainder is treated as income when you take it, however you take it – and so subject to income tax at your relevant rate of tax. You can still buy annuities should you want to. That’s it.

Running out of Money

The difficulty is that for most people their pension needs to last as long as they do…. ideally a bit longer if they have a spouse that outlives them too. So in practice you need to be careful about how much you take, its got to last and once its gone, its gone. So you have to guess how long you and your spouse might live (clue – actuaries do this for a living and designed annuities).

Make a Plan

So you will also need to reflect on how much income you need, what plans you have and it would be sensible to allow for some unexpected costs. You may need to pay for your own care or medical treatment – if you wish to choose how this is provided to you. You will also need to reflect on the impact of inflation, which at the moment is at record lows – but do the things you pay for really have such a low rate of inflation? and making a guess now for the next 20, 30 or perhpas 40 years of retirement needs some proper thought. If you don’t buy an annuity (which for many will be a very sensible option) the fund will need to grow (just to stand still and keep pace with inflation at the very least) – so how much investment risk is appropriate? what returns do you really need? what happens if these aren’t achieved? how will the portfolio be looked after? … and so on.

Review the Plan

As a result of these new “freedoms” (which some already enjoy anyway) you have a plethora of choices and the truth is that these need to be reviewed – in fact thats the beauty of it all, you get to alter your decisions (unlike simply buying an annuity and having to live with the consequences for the remainder of your life). The ability to access the money means that the crooks are on the scent… be it “pension liberation” or rubbishy investments that aren’t regulated and promise more than they could ever deliver. An independent financial adviser can sort the wheat from the chaff, but a financial planner, will do that and also help you plan your income requirements to suit your unique requirements.

Was that really so hard?

Dominic Thomas

Dispatches: How to Blow Your PensionDominic2025-01-27T16:12:33+00:00

The rising

TODAY’S BLOG

HOW MUCH FOR A HAPPY RETIREMENT?

£26,000 OR £19,000

TWADDLE – THAT THING ABOUT ASSUMPTIONS

Its Your Lifestyle: how much is enough?

GET IN TOUCH

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

GET IN TOUCH

7 QUESTIONS, NO WAFFLE

Are we a good fit for you?

Are Annuity Rates on the Rise?

New Rates

How long is a lifetime of income?

The crossover point

Taxing reforms for pensions

Tax Overpayments

Reforming tax relief

Shrinking the Pot

Changing the Sweetener

Simplicity Seems Dead

If I were Chancellor?

Are you an Equitable Life policyholder?

The Big Broken Promise

Space travel has significant risks

Dispatches: How to Blow Your Pension

New Pension Rules – Simple

Running out of Money

Make a Plan

Review the Plan