Monthly Archives: October 2010

With annuity rates at a record low and certainly no sign of recovery in the short term retirees are looking for more flexible retirement income options. The With Profit annuity is an Asset-backed annuity that invests in the with profit fund and if the underlying assets perform well then retirement income increases by the addition of bonuses. The converse of course applies that if the underlying assets of the with profit annuity provider perform poorly then bonuses may not be declared and retirement income may actually fall.

Who are with profit annuities for?

These with profit annuities are available to everybody and can even be provided on an enhanced annuity rates basis if the annuitant qualifies. However, they do suit those with larger funds and prepared to accept the risk that income may fall. Of course some retirees may choose to put a percentage of their pension fund into the with profit annuity, many retirees choose to put 75% of their pension pot into guaranteed annuities and the remaining 25% into asset-backed annuities.

With a with profit annuity you choose an Annual Bonus Rates (ABR) at the beginning and if this rate can be sustained by the performance of the underlying assets of the fund then your income level will remain intact. it is important to note that the fund is not your own fund as with income drawdown, but pooled with other investors.

Which annuity providers offer with profit annuities?

With profit annuities are available from the likes of Prudential, Legal and general and LV= to name a few.

Here at Retirement Solutions we have had many questions on the changes to the default retirement age changes so we have put together this question and answer section.\r\n\r\nWhat will the default retirement age changes mean to workers and pre-retirees?\r\n\r\nYour questions answered.\r\n

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• Question: Why is the government planning to end the default fixed retirement age?

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• Answer: Many people are not saving enough for retirement and risk not having the income they would hope for it if they retire at the €˜traditional€™ age of 65. By working for one year past the existing state retirement age, currently 60 for woman and 65 for men, people could potentially increase their retirement income by between 3 per cent and 10 per cent. The government says it wasn€™t to tackle age discrimination, but this move will also alleviate the burden on the state.

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• Question: Am I able to work beyond 65 now if I want to?

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• Answer: This will ultimately depend on your own employer. Employers do not have to retire employees once they reach 65, and are free to continue to employ them as long as they wish, but some may require you leave at 65.

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• Question: Will I still be able to retire at 65 under the new proposals?

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• Answer: Yes. The government has not indicated that it will prevent people from retiring at 65.

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• Question: Will I be able to retire even earlier?

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• Answer: Some people with private pensions are already able to retire from the age of 55. Individual employers may allow you to retire early.

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• Question: Will I be able to contribute to my company pension beyond 65?

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• Answer: Yes. You will be able to keep contributing to your pension. You can continue to make pension contributions and receive tax relief up to your 75th birthday.

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• Question: If I work longer, can I save less for retirement?

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• Answer: No. the government wants workers to continue more to their pension provisions, not less. The larger your pension, the less of a burden as a retiree you might be on the state.

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• Question: Does the change affect my state pension entitlement?

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• Answer: The state pension has its own timetable, which is also currently under review. The government is consulting on how it can accelerate the planned rises to the state pension age more quickly than is currently legislated for, initially to age 66 but ultimately to 68. The government has yet to announce whether those working longer will be able to defer their state pension. If you take it at age 66 but work until you€™re 70, you would pay tax on your state pension as if you are still working, so thee are plenty of details to be ironed out by the government.

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\r\nYou can read these and other retirement planning articles in our September/October 2010 Smart Money magazine. Download a copy below.\r\n\r\n

Equity release is a complex product and it is purchased by many people who are in their late 60′s and early 70′s. This age group are classed as vulnerable when it comes to making purchase of financial services products, this is why it is vital to seek independent legal advice before committing to an equity release scheme. The reason that this age group is vulnerable is that if they make a financial mistake then they have a shorter time than average to be able to recover the mistake.

It is important that a client obtains independent legal advice when taking out an equity release mortgage so that they fully understand the legal implications of doing so. Clients who tend to take out these types of mortgage are usually of retirement age and sometimes do so as they are living on a limited income and wish to increase their income by releasing some of the equity in their property. Some clients however, struggle to make ends meet and believe that they have no other options available to them. In such a position the client is often vulnerable and pressured and therefore needs clear advice and guidance before entering into the mortgage. Source: Joanne McNally, at the property department at Lees Solicitors LLP

Not all equity release schemes insist on independent legal advice and if this is the case then you would be well advised to seek advice and also if possible take a family member or relative with you to the meeting.

Equity release is available to those over age 55 years old, it comes in two main types of scheme, the first, lifetime mortgage and the second home reversion scheme.

There are many equity release experts forecasting that the ‘home’ will become a pension solution as many retirees struggle to make ends meet once retired. Equity release has been around since about 1965, but until recently it was seen as a last resort product and not a retirement planning product.

Research by LV= has indicated that of those planning to use the equity in their home, nearly a quarter (22%) believe this is now their best option, because their pension savings won’t give them the income they hoped it would, with 13% saying it’s all they have to rely on after the state pension. But interestingly, two-thirds (64%) said they had always planned to use their property for their retirement; the majority by selling but with 12% already planning to release equity.

Here at Retirement Solutions we asked independent financial adviser and equity release expert Adam Benson to comment on why there seems to be a shift in emphasis on equity release from last resort to retirement planning product, Adam said, “I think it is because many retirees now have smaller pension pots due to stock market crashes, many also still have mortgages when they retire and also annuity rates are at a 20 year low with forecasts that they will continue to fall further. So many retirees have no where else to turn that there home which is probably their biggest asset.”

According to the Association of British Insurers (3rd Quarter 2009) over 80 per cent of annuities were bought with funds of less than £40,000. This trend is predicted to continue.

Partnership, a specialist enhanced annuity provider, estimates that out of the 270,000 people who purchased annuities last year with funds under £40,000 only 70,000 shopped around. That means there were 200,000 people that may have obtained better annuity rates had they taken the time and effort to use their right to the open market option.

Partnership also belive that this group of people that just bought the pension from the pension company they saved with will collectively lose £450 million.

So why do 200,000 people not bother to take the open market option for what is probably the most important purchase during their lifetime? We asked Jennie Gray an independent financial adviser, Jennie said, “I think it is the fact that they do not undersatnd what it means to them, the information from the pension providers is complicated and some of the important detail about the open market option is deep into the literature. People tend to take the easy route and just sign for the rates offered by the pension company they saved with, without understanding the implication.”

To get the best annuity rates at retirement it is vital to shop around and use your right to the open market, remember you only get one chance.

Aviva the equity release specialist insurance company has announced that it has completed its 100,000th equity release completion. Home equity release is available to those aged 55 and over and can either be in the form of a lifetime mortgage or home reversion scheme.

Darren Dicks, head of ‘at retirement’ at Aviva, says: “For many people, equity release is a way of releasing cash to fund special purchases or holidays, a new car, or simply to increase regular income and pay bills. Equity release is becoming an increasingly popular and important part of retirement planning.”

There has been a significant amount of bad publicity surrounding equity release, much of which goes back to plans that were available in the 1970s and 1980′s that are no longer available today. The modern plans that are available today bear absolutely no resemblance to these old style plans.

Aviva Equity Release plans are available from age 55 for the lifetime mortgage products and age 65 for the Aviva home reversion plan. Aviva currently have the highest loan to value plan available for those that really do need to take the maximum amount of equity from their home.

A Fixed Term Annuity Plan offers clients a fixed income (if required), to the the current Government Actuary’s Department (GAD) maximum, together with a Guaranteed Maturity Amount at the end of the chosen term which is unaffected by stock market volatility. Fixed term annuities also offer a range of optional death benefits. These fixed term annuity plans usually have terms from 3 years, however, once selected at the start of the Plan term, benefits cannot be changed.

Features
• Keeps client options open – more flexibility than a lifetime Annuity
• Ability to select income level at outset for the chosen term
• Guaranteed Maturity Amount (GMA)
• Choice of death benefits
• No annual management charges
• No investment performance risk
Source: Living Time

The main advantage of these fixed term annuities is that they offer a Guaranteed Maturity Amount (GMA) at the end of the chosen term, which gives the retiree a second chance to buy an annuity. With some providers such as Living Time, the GMA is fixed and not affected by investment performance.

If health has deteriorated when the GMA is paid then an annuity at enhanced rates may be purchased, subject to underwriting by the annuity provider. Alternatively, you can roll the product into another fixed term.

Enhanced annuities can make a significant difference to retirees income and not just in the year of retirement but over the whole of the retirement years.

The latest MGM Advantage Annuity Index1 shows that over the course of an average retirement, there is approximately a £13,000 difference in income received from an average conventional annuity compared to an average enhanced annuity.

Source: MGM Advantage

What are enhanced annuities

Enhanced annuities are those that are paid to retirees that have shorter than average life expectancy and therefore will receive the income from their annuity for a shorter period. The number of qualifying conditions is over 1500 and they can be used on their own or in combination. For example, a smoker would qualify for enhanced annuities on its own, but in combination with say high blood pressure or high cholesterol then the combination would give significantly enhanced rates.

Before you exchange your pension pot for any annuity you should check to see if you qualify for enhanced rates, many people can qualify for enhanced annuities by their BMI or height and weight, even excess alcohol consumption can qualify in some cases.

To help you understand some of the key words and phrases for annuities here is a list of common annuity terms explained:

Additional state pension
A pension paid on top of your basic state pension. It used to be called SERPS but is now called the State Second Pension. Self-employed people cannot build up an additional State pension.

Alteratively secured pension
On your 75th birthday, a way of getting an income from your pension fund without buying an annuity. This income is taxable.

Annuity rate
The amount of monthly income you get for your pension fund, which is dependant on several factors such as your age, sex, state of health and the type of annuity you want.

Annuity Calculator
A software program that takes personal details and pension fund information to produce you an annuity quote.

AVCs – Additional Voluntary Contributions
A pension top-up policy for an occupational pension. You pay contributions into a scheme run by your employer to boost your main pension.

Commutation
Taking your pension benefits as cash if they do not exceed a certain level. This level changes each tax year. This is sometimes known as ‘triviality’

FSAVCs – free-standing additional voluntary contributions
A pension top-up policy for an occupational pension, but separate from your employer’s pension scheme and normally run by an insurance firm.

Inflation
This happens when prices go up throughout an economy. The effect of inflation on your money means that it will buy less each year.

Lifetime annuity
An investment that converts your pension fund into pension income that is paid to you for life. The income is taxable.

Market value reduction
A reduction to your pension that could apply if you want to cash in your with-profits policy before or after its maturity date or other date(s) specified in the policy.

Open market option
Your right to shop around and buy your annuity from the company offering the best deal for you.

Retirement annuity contract (RAC)
An RAC is similar to a personal pension, but was sold before 1988 when personal pensions first became available.

S32 policy (buy-out bond)
Used by members of occupational pension schemes when they leave service or the scheme is wound up. A way of securing scheme benefits in the name of the employee.

Tax-free lump sum
An amount of cash set by HMRC which you can take at retirement free of tax. Individual pension schemes may have different rules on the amount of tax free cash you can take

Whole of market adviser
An adviser who offers advice on products from the whole market.

Hargreaves Lansdown chief Peter Hargreaves reports record profits as he steps down. The 63-year-old, who steps down as Hargreaves Lansdown chief executive, backed Treasury plans to slash the UK’s “horrendous” debts and called for less red tape.

He described the City of London as a “gem” which needed to be nurtured not attacked through high levels of taxation and banker-bashing.

It came as he unveiled record results at Hargreaves Lansdown, the stockbroker and fund manager which he co-founded in 1981 with Stephen Lansdown.

Annual profits jumped 18% to £86.3 million as the firm sucked in a net £3.3 billion from savers and investors — 65% more than in the previous year.

The company’s assets under management leapt by 47% to £17.5 billion.

Hargreaves, 111th in the Sunday Times Rich List with a fortune of £570 million, said: “If the Government does what it says it is going to do — if it really cuts the public sector — it will be the best Government we have ever had. Source: This is London

Hargreaves Lansdown is a financial services company that sells annuities and pensions amongst other financial services products.

We asked Kevin Stelfox, Sales Director at Retirement Solutions to comment on the news about Peter Hargreaves stepping down as cheif executive, Kevin said, “Hargreaves Lansdown are a hugely respected financial services company and one that every other independent financial adviser aspires to be.”