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

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

Pensions: Annuities starting to improve?2023-12-01T12:40:16+00:00

Facing the questions

It occurs to me that as a nation, we are avoiding many rather important questions. I love Britain and the freedoms we enjoy. I want a fair welfare system. However, until politicians, economists, financial advisers and the public at large face a few important questions, we seem destined (in the main) for more people reliant upon State support. In essence we collectively seem to agree that it is better for each of us to gain financial independence from the State or any other source of funds. There are variety of questions that come to mind, which challenge this assertion.

  • Why is it easier to get into debt than to save?
  • Why is it easier to borrow money at 100%+ interest than 4%?
  • Why is it easier to open an online gambling account than an ISA?
  • Why do more people play bingo than save for their pension?
  • Why do more people spend more money on a mobile phone than invest into their pension?
  • Why do so few people write a Will?
  • Why do more people take out travel insurance than suitable financial protection?
  • Why has betting become so popular and investing so problematic?
  • Why have we become such a litigious society, yet unwilling to take personal responsibility?
  • Why do so many people complain about low interest rates, yet do not invest?
  • Why is the financial community obsessed with the risks of investing but not the purpose?
  • Why do so few people take action?
  • Why do so many fail to review their arrangements?
  • Why do so many pay for a gym that they don’t attend?

To my mind, it seems that financial planning is rather like a diet. I accept that this is a contentious statement. Most people do not like dieting (by which I mean observing, controlling and restricting what is consumed). A “healthy” diet is only one part of the equation, we all know that regular exercise when combined with a good diet will yield results. I am someone that wrestles with this very issue. The problem most of us have is that we want quick results, we are generally unable to take a long-term perspective. Little wonder, given a culture obsessed by image and reaction. It doesn’t really matter how much you spend on a gym, how many books you read, how many videos/DVDs you watch, how much kit you buy… it all boils down to what’s going on in your head. Despite many motivational guru’s that have some considerable results for a few people, we all know that there are very few short-cuts and its all about a long-term perspective and a change in lifestyle. A key question is really are we prepared, willing and able to change?  I don’t subscribe to the belief that this is a simple “change of attitude” but it certainly requires change.

I am open to thoughts, insights, suggestions and answers..

Dominic Thomas: Solomons IFA

Facing the questions2023-12-01T12:23:49+00:00

Cash Deposits – in defence of Premium Bonds

We all know that interest rates are depressingly low for savers (though good news for borrowers). There has been some coverage of National Savings Premium Bonds which has been rather unfavourable, so I thought that I would provide my thoughts on this.

As with all cash deposits, cash as a long-term investment strategy is not a good idea. Why? simply because of inflation. If interest rates are 2% and inflation is 3% then in real terms you are losing money each year, by losing I mean your £1 has less purchase power. So can we agree that cash holdings are for emergency funds, for people that are very anxious about other forms of investing and for planned major expenses. There are no rules or rights or wrongs, but holding cash is sensible for anyone, as it provides liquidity (rather than having to borrow or sell assets).

Turning to Premium Bonds. These are very basic, you buy each bond for £1. You can hold up to 30,000 so £30,000. You are not guaranteed any interest – indeed there is no interest at all. However, your £1 bond with its unique number is automatically entered into a draw. Each month someone wins £1m. Most don’t win at all, but in general those with the full £30,000 allowance tend to win small prizes, which over the year amount to about £450 (1.50% of £30,000). This money is tax free. So for a 20% taxpayer is equivalent to 1.875% gross and a 40% taxpayer equivalent to 2.50% gross. These rates are best compared against monthly interest paying accounts with 30 day notice. You will find very few accounts paying these sorts of rates. Sure a little bit more in a few instances, but not much. Given that we are talking about £30,000 an extra 0.5% is worth £150 over a year… not a significant sum when you consider that it would be taxable, involve the hassle of opening a new account and removes you from the possibility of winning £1m. I might add, that it is also a bit of fun, opening an envelope to discover your winnings. More fun than opening a bank statement, or indeed one of our portfolio valuations (unless you find particular joy in this exercise). Last month someone won £1m, 5 people won £100,000, 9 won £50,000, 18 won £25,000, 48 won £10,000 and 93 won £5,000. The smallest prize (£25) was paid out to nearly1.8m people in June alone.

The news is that the chances of “winning” (from £25)  will reduce from 24,000:1 to 26,000:1 on August 1st 2013. As a result the current appropriate 1.5% rate is now more like 1.30%. So on £30,000 you might expect £390 of tax free winnings over a year. To a basic rate (20%) taxpayer this is equivalent to 1.625% and a 40% taxpayer equivalent to 2.16%. These are still decent rates. Sure nothing to write home about, but pretty competitive never-the-less.

Yes the rates are poor, but then that’s true of all similar types of accounts. As I have said cash is not a long-term investment strategy, it is a helpful emergency reserve and buffer. Whatever the economic climate, holding some cash would be entirely sensible. The question is really about having a properly thought through investment strategy that enables you to achieve your goals.

So please remember, this is not advice to rush out and buy premium bonds. This is my opinion in response to some negative coverage about them.Unlike the lottery you get your money back, the same money is re-entered into the draw each month. For the record, none of our clients have yet won the £1m jackpot and I would not advise anyone to rely on winning a jackpot as an appropriate form of providing for your future…that’s just wishful thinking.

Dominic Thomas: Solomons IFA

Cash Deposits – in defence of Premium Bonds2023-12-01T12:23:47+00:00

Cash ISA latest rates

Latest Cash ISA Rates

There continues to be the expected speculation about inflation and interest rates – how on earth would the media use their time if they didn’t spend so much of it guessing the future?  As we know, official inflation rates are falling, yet you and I probably pay more for the things we actually consume, strange but true. Anyway, here are some of the top rates currently available. Please note that this is simply a list, it is not advice. It is important to ensure that your funds are ideally within FSCS compensation limits and not restricted due to shared banking licenses.

Instant Access Accounts

  • On-line: Melton Mowbray 2.50%
  • Bank: Virgin Money 2.20%
  • Building Society: 2.35%

Cash ISA – Variable Rates

  • On-line: Sainsbury’s Bank 2.80%
  • Bank: Virgin Money 2.40%
  • Building Society: Earl Shilton 2.70% (90 day notice)

Cash ISA – Fixed Rates

  • On-line: Bank of Cyprus UK 3.20% (3 years)
  • Bank: Halifax 3.60% (5 years)
  • Building Society: Yorkshire 3.20% (fixed until 31 May 2014)

I have to admit that I’m not overly comfortable with a society that has supermarkets offering banking services, which probably says more about Banks than it does about supermarkets. However many people visit their supermarket more than they visit their bank. I have to admit that I prefer to visit neither and am rather an advocate of on-line service.

New ISA Allowance for 2013/14

You may wish to know that the ISA allowance is now linked to inflation and the September figure for inflation (2.20%) is used for the following tax year. So the 2013/14 ISA allowance will be £240 more. As a result the full 2013/14 allowance will be £11,520 with up to half this into a Cash ISA (£5,760).

Cash ISA latest rates2023-12-01T12:23:04+00:00
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