Friday, 1 March 2013

New Rules on Pension Annuities

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By the end of this week, the rules governing annuities in the UK will change.
Previously, the rules in force for using your pension pot were as follows: 
  • You could cash out a maximum lump sum of 25% from your pension pot
  • The remaining 75% of the pot HAD to be converted to an annuity by the time you reached 75
I looked into this a little while ago, as I thought it best to have some sort of minimum target figure in mind to aim for and was very disappointed by how expensive annuities appeared to be. For example, after a quick google search for an annuity calculator page, it turns out that from the age of 65, £100,000 would only buy you an annuity of £3,000/year, and that's today.
Frankly I can't see the average 65 year old punter today, making it to anywhere near 95 years before checking out. Can you? And there certainly will be very few who make it particulary far past 95. It seems obvious that pension companies are on to a winner here and generally the customer loses out.
It also answers another question I had.
I've been wondering for a while now, where everybody's family wealth goes. It seemed to just evaporate... I know that personal finance ideas of financial independance and the like has been around for a while now, and I couldn't work out how/why people hadn't reached that point (on a family basis) over 2 or 3 generations. Well, now I know.

Most people don't get much in the way of an inheritance for the following reasons:
  • Having more than 1 child
  • Inheritance tax (40%!!)
  • Annuities
Firstly, most people don't have more than one home, so if you have more than one child, then after your death, your home would need to be sold off to split up the capital locked away in the property. With one child, they could potentially live in the home mortgage free, or sell it and pay off their own mortgage.
Secondly, if you're net worth is more than £325,000 then your estate over this amount is taxed at 40% when it's passed on. That's a lot of dosh, and particularly unfair when you think that you've already paid tax once accumulating that amount of assets in the first place... >:|
Lastly, an annuity expires when you do, or sometimes when your surviving partner does. This is a serious wad of cash that heirs will miss out on, and as some people sell their homes to afford bigger annuities, again nothing is left to any heirs. 
There doesn't seem to be much upside to all of this, although there is the tax relief our government gives you on the money you stash away, but at least this breaks the bond holding you to an annuity/pension company, so the fact that after 40 years or more of saving into a pension fund, you can now do what you want with it is very good news indeed. Not just for those of us who haven't cashed our pensions in yet, but also for future generations too. It wouldn't be too hard to invest and generate 3% on a lump sum of £100,000 and when you caught the last bus, at least your kids would still have that £100,000 rather than the pension company.


  1. I've been looking into personal pensions and was horrified to read that between 14-14% of the value of your pension pot is eaten up by annual fees:

  2. Such bollocks. 40% is bloody too high >_< People shouldn't have to pay tax twice, but if they do it shouldn't be so much the second time. And £325,000 isn't what it use to be anymore. I like the new rules regarding annuities though. Anything that gives more options to me when I retire just means I can be more flexible with my financial planning. I hope we adopt something similar. In Canada, as of now, you have to convert your entire pension pot (RRSP) into an annuity by the year that you turn 71. Wait, I didn't know an annuity expires when you die. So if you're a widow and cashed in your pension worth 100,000 quids to buy an annuity, then you pass way tomorrow, does the £100,000 remain with the annuity company or does your living heirs get a piece of it?

  3. One must keep track of time value of money he invests during the entire pension plan. Minus the payments.


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