06/01/15Here’s another…and another…
Well hello and a happy new year!
Christmas came and went, but the extra pounds on the waistline still remain…oh well….
I have dispensed with a picture for this blog, opting to focus on content, although there was a comedian before my time who used the catchphrase ‘and another thing…’ though I’ve no idea who he was.
I refer to the pensions minister, Steve Webb for this month’s title. Not content with allowing a 55 year old to fully crystallise their pension fund for cash, he is proposing to allow people to reverse out of annuity.
Now I’m going to go out on a limb here…In my opinion, I can see those with a pension fund of around £20-30k going for full encashment. There is a very good chance that this will be the most amount of money that person has seen in one lump sum and after years of scrimping and saving, wants to be able to celebrate retirement. There is also the hard, honest fact that the additional income available from that size pension fund (maybe £1500 a year) may not be significant enough, to make a difference to the household budget. Anything beyond that fund value, must be looked at many ways before going for the full cash value, because when £2,000, £3,000 or £4,000 per annum can come into a household each year, every year then due diligence must be performed.
To reverse out of an annuity in an entirely different scenario. An annuity on the face of it, is an insurance contract. Using current base rate, health, age and sex of the individual a rate of return is given, payable every year until death and possibly continuing at a reduced rate to your surviving spouse, until they die. So an annuity could have a life span of 40 years. Behind the scenes, the annuity company needs to make its money work, after all, it can’t just stick it in a bank account and rely on the interest. So using complex financial instruments it set’s itself up to ensure that not only are the payments out agreed, but that there is some growth as well, not only from the instruments, but also on the dynamics of the clients themselves…In other words, they die earlier than expected.
So this system has worked for centuries. But now, it’s mooted that you can cash in your annuity. How will the annuity company cope? Would it pay out the full fund value, or would penalty clauses apply? Who would recommend you remove funds from an annuity? Bearing mind, that, if you’re a male over 55 and taking a statin, then you’re quite likely to benefit from an enhanced Annuity of around 6% per annum. If the annuity company saw that funds had to be more readily available, could they make enough return on capital to pay the levels they pay? Would rates have to be reduced?
There are times when over tinkering just leads you back to where you were, with no benefit and a lot of time spent on it. With Auto enrolment hitting smaller and smaller businesses, I think the working public have enough to deal with on pensions at the moment, without another possible addition.
Too much choice leads people to be confused and as such, defer things, or worse still, make a quick decision to go for the wrong option.
If my blog has caused you to stop and think, then please, get in touch via www.business-ifa.co.uk my first meeting either at my office or yours is free and without obligation on either side.
Take care and see you next time.
PS. Please forgive this shameless plug. From 2nd- 6th March I’m walking Hadrians Wall for Great Ormond Street Hospital..to find out why, please read my story at www.gosh5015.co.uk thank you