£1.5m pension pot.
Discussion
surely depends on how much you enjoy earning your money, how many hobbies/interests/plans for retirement
I think its so much dependant on personal circumstance...I aim to be there myself by 55 and the dream of course is to get away from the responsibilities of work, but in reality I could be bored in a year and doing part time work...except it will be something for the fun of it
I have seen examples of friends who have retired early who are now back working, and others that are leading relatively mundane lives...only you can decide what truly makes you happy
what the money gives you (as always) is more choice....choice not to do anything if you so wish
I think its so much dependant on personal circumstance...I aim to be there myself by 55 and the dream of course is to get away from the responsibilities of work, but in reality I could be bored in a year and doing part time work...except it will be something for the fun of it
I have seen examples of friends who have retired early who are now back working, and others that are leading relatively mundane lives...only you can decide what truly makes you happy
what the money gives you (as always) is more choice....choice not to do anything if you so wish
Keep it simple: let’s use £1m to buy an annuity; it gets you roughly £45k per annum (single life, level, no inflation protection). You could build inflation protection in but income will start at a much lower level, so let’s not complicate it with that.
If you defer, for say 5 years, then you should get a higher annuity rate because you’re older and the annuity will effectively be paid for 5 years less. However, if life expectancy continues to increase then you might not get as much as a 60 year old would today. Interest rates ought to increase over the next 5 years so that could equate to more income.
Let’s assume life expectancy and interest rates do not increase. The income at age 60 would be roughly £50k. However, you’ve lost 5 years at £45k = £225k. You will need to reach age 100 before you make up this lost income. There’s more to it than that, your pension pot remains invested so should increase in size but then again it could fall in value too. If it grew at 5%pa then there would be a bigger fund to buy an annuity, which would amount to about £64k of income. It would now take until age 71 to make up the lost income from deferring. You’re buggered if it falls in value and 5%pa is in no way guaranteed!
http://www.annuities-online.com/calculators/cost-o...
An annuity is not the only answer. You could draw an income directly from your pension fund – it’s called income drawdown. Your pension pot remains invested so could rise or fall in value. You’re presented with similar issues as you are when deferring but you’re not tied down to current rates and if your health changes for the worse as you get older then you may qualify for an enhanced annuity rate at some point in the future which bumps income up a gain. By the way, if you die whilst in drawdown the pension pot is paid to your estate (less 55% tax), or income can continue for a spouse/dependant (no 55% tax). When an annuity is purchased it dies with you after any guarantee period has expired (assuming it’s not a joint annuity)
http://www.annuities-online.com/calculators/drawdo...
Drawdown is an attractive option for people that can understand and take risk. There will be advice charges for setting up drawdown plans – think of those as reducing what you have available to purchase an annuity.
There are also fixed term annuities that guarantee to give back an amount at the end of the term (agreed at the outset) for purchasing an annuity in the future or buying another fixed term annuity. Similar to drawdown but less risk as a result of knowing what you will have available for annuity purchase in the future. Bear in mind, with a guarantee comes cost.
There are other options for annuities but the three above are the most common these days.
Always seek professional advice on this subject, there is much more to it than the simple examples that I have given. The above should not be taken as advice.
If you defer, for say 5 years, then you should get a higher annuity rate because you’re older and the annuity will effectively be paid for 5 years less. However, if life expectancy continues to increase then you might not get as much as a 60 year old would today. Interest rates ought to increase over the next 5 years so that could equate to more income.
Let’s assume life expectancy and interest rates do not increase. The income at age 60 would be roughly £50k. However, you’ve lost 5 years at £45k = £225k. You will need to reach age 100 before you make up this lost income. There’s more to it than that, your pension pot remains invested so should increase in size but then again it could fall in value too. If it grew at 5%pa then there would be a bigger fund to buy an annuity, which would amount to about £64k of income. It would now take until age 71 to make up the lost income from deferring. You’re buggered if it falls in value and 5%pa is in no way guaranteed!
http://www.annuities-online.com/calculators/cost-o...
An annuity is not the only answer. You could draw an income directly from your pension fund – it’s called income drawdown. Your pension pot remains invested so could rise or fall in value. You’re presented with similar issues as you are when deferring but you’re not tied down to current rates and if your health changes for the worse as you get older then you may qualify for an enhanced annuity rate at some point in the future which bumps income up a gain. By the way, if you die whilst in drawdown the pension pot is paid to your estate (less 55% tax), or income can continue for a spouse/dependant (no 55% tax). When an annuity is purchased it dies with you after any guarantee period has expired (assuming it’s not a joint annuity)
http://www.annuities-online.com/calculators/drawdo...
Drawdown is an attractive option for people that can understand and take risk. There will be advice charges for setting up drawdown plans – think of those as reducing what you have available to purchase an annuity.
There are also fixed term annuities that guarantee to give back an amount at the end of the term (agreed at the outset) for purchasing an annuity in the future or buying another fixed term annuity. Similar to drawdown but less risk as a result of knowing what you will have available for annuity purchase in the future. Bear in mind, with a guarantee comes cost.
There are other options for annuities but the three above are the most common these days.
Always seek professional advice on this subject, there is much more to it than the simple examples that I have given. The above should not be taken as advice.
Edited by macca on Monday 18th March 21:06
Invest into decent Comercial property and use draw down.
Annuities are a way of lining Insurance companies pockets.
Save your whole life to get a £1.25m pot to get £40k per annum back on an annuity
http://www.thisismoney.co.uk/money/pensions/articl...
No thanks
Annuities are a way of lining Insurance companies pockets.
Save your whole life to get a £1.25m pot to get £40k per annum back on an annuity
http://www.thisismoney.co.uk/money/pensions/articl...
No thanks
flyingjase said:
Invest into decent Comercial property and use draw down.
Annuities are a way of lining Insurance companies pockets.
Save your whole life to get a £1.25m pot to get £40k per annum back on an annuity
http://www.thisismoney.co.uk/money/pensions/articl...
No thanks
This has always been my bugbear too. Annuities are a way of lining Insurance companies pockets.
Save your whole life to get a £1.25m pot to get £40k per annum back on an annuity
http://www.thisismoney.co.uk/money/pensions/articl...
No thanks
I have a property worth £500k that generates £36kpa so say £30k pa after expenses. So that equates to £60k pa on double, but let's be extremely generous and call it £40k pa after voids (though the reality is significantly less). Now it's the same as the annuity, but when I die, my wife still has £1m worth of property, and when she dies, at the very least my kids still have £600k (assuming IHT allowances used elsewhere - would be more otherwise). Oh, and rental would increase with inflation, as would, generally, value of the property.
So why would anyone buy an annuity? Genuine question.
Boshly said:
This has always been my bugbear too.
I have a property worth £500k that generates £36kpa so say £30k pa after expenses. So that equates to £60k pa on double, but let's be extremely generous and call it £40k pa after voids (though the reality is significantly less). Now it's the same as the annuity, but when I die, my wife still has £1m worth of property, and when she dies, at the very least my kids still have £600k (assuming IHT allowances used elsewhere - would be more otherwise). Oh, and rental would increase with inflation, as would, generally, value of the property.
So why would anyone buy an annuity? Genuine question.
Annuities can guarantee a regular monthly income that (if you want) rises in line with CPI.I have a property worth £500k that generates £36kpa so say £30k pa after expenses. So that equates to £60k pa on double, but let's be extremely generous and call it £40k pa after voids (though the reality is significantly less). Now it's the same as the annuity, but when I die, my wife still has £1m worth of property, and when she dies, at the very least my kids still have £600k (assuming IHT allowances used elsewhere - would be more otherwise). Oh, and rental would increase with inflation, as would, generally, value of the property.
So why would anyone buy an annuity? Genuine question.
Annuities are no hassle whatsoever. The money just pops straight into your bank account each month without having to lift a finger.
You can't say either of those things about property investments. Most people want to stop working when they retire.
With annuity rates and interest rates like they are and less saving for retirement that's going to be increasingly harder for people to achieve.
I'd have to agree with what some have said on here, annuities may be easy but they are a rip off IMO. Invest in property and as already stated you get the double benefit of a monthly income as well as capital growth. I know many retired people that do exactly this and they are doing fine, can afford to go on a holiday or two and even have the heating on during winter . £1.5m will buy you a lot of rental property and secure you a very decent income.
Renting isn't THAT hard a chore, it's not like working a full time job. It will take up 10 days of your time out of a year at most and that's assuming you don't get a letting agent to look after it for you. If people are too lazy to bother to do even that then tbh they deserve to be ripped of by the pension companies. I'm of the opinion that the person best placed to secure my financial future and look after MY interests is me.
. £1.5m will buy you a lot of rental property and secure you a very decent income.Renting isn't THAT hard a chore, it's not like working a full time job. It will take up 10 days of your time out of a year at most and that's assuming you don't get a letting agent to look after it for you. If people are too lazy to bother to do even that then tbh they deserve to be ripped of by the pension companies. I'm of the opinion that the person best placed to secure my financial future and look after MY interests is me.
Edited by Guvernator on Wednesday 20th March 15:45
LeoSayer said:
Annuities can guarantee a regular monthly income that (if you want) rises in line with CPI.
Annuities are no hassle whatsoever. The money just pops straight into your bank account each month without having to lift a finger.
You can't say either of those things about property investments. Most people want to stop working when they retire.
With annuity rates and interest rates like they are and less saving for retirement that's going to be increasingly harder for people to achieve.
I hear what you are saying but in my example above I have discounted income heavily to be simply in line with the annuity returns. Those quoted were fixed, if you elect to have them rise with CPI the amount would diminish (as shown by the referred money expert article in a post above).Annuities are no hassle whatsoever. The money just pops straight into your bank account each month without having to lift a finger.
You can't say either of those things about property investments. Most people want to stop working when they retire.
With annuity rates and interest rates like they are and less saving for retirement that's going to be increasingly harder for people to achieve.
As such, I can assure you if I asked 75% rate of going rents, and allocated the rest to management by a decent company I would have virtually no hassle whatsoever and the money would "pop straight into my account" and I would still have the capital and a growing return and hopefully a growing asset.
For clarity two £500k buildings would generate £72k, so if I asked £54k and allocated £14k pa repairs and costs (and that's a lot of money!) it would be the equivalent of the annuity mentioned. I know the numbers aren't precise but it works as a ballpark comparison.
I am also very much aware that the property held needs to be 'right' and 'rentable' but its not brain surgery? Or am I still missing something?
Boshly said:
I would still have the capital and a growing return and hopefully a growing asset.
It's very likely but there's no certainty. Although the historic trend of property prices and rental returns is definitely on the rise, there's no guarantee and when buying a small number of properties there's the risk of buying just before the start of a slump in the house price/rental market. This could be national or confined to local areas for local reasons.Many people I know who are close to retirement age would't countenance property investment, don't have the knowledge or skills to make a sensible decision and probably don't have the means to get the finance required.
I'm not saying it's a bad idea, just not for everyone and not risk-free.
Annuities are poor value but they are also guaranteed. When you analyse how they actually work, you're getting your money back plus a rate of return in the region of 2.75%pa providing you make average life expectancy; live longer and you do better, die earlier and the value is even worse. That's why income drawdown is so popular these days - income is governed by the rate of return from the underlying investments but carries risk in that it can fall in value just like a property which also carries maintenance cost, capital gains tax on sale or iht on death and the risk of being empty and not generating an income from time to time. Don't get me wrong, I like property just saying that pensions are not as bad as some of you think - spread the risk!
Something else to think about, when building up the funds to buy an annuity tax relief up to 40% is generally available (ignoring lifetime limits) and 25% is available as a tax free lump sum at the end - you could buy a property with that. It's not really fair to compare property purchase with a pension because of the tax relief; you will always amass more funds in the pension than an alternative method of saving due to the tax relief.
And, one other thing with pension. Get into financial difficulty and face bankruptcy and they will take the house off you - I've seen this happen. They can't touch the pension!
Something else to think about, when building up the funds to buy an annuity tax relief up to 40% is generally available (ignoring lifetime limits) and 25% is available as a tax free lump sum at the end - you could buy a property with that. It's not really fair to compare property purchase with a pension because of the tax relief; you will always amass more funds in the pension than an alternative method of saving due to the tax relief.
And, one other thing with pension. Get into financial difficulty and face bankruptcy and they will take the house off you - I've seen this happen. They can't touch the pension!
Edited by macca on Wednesday 20th March 22:20
i tend to restrict pensions to clients that have additional benefits in the form of either an employer contribution (no point turning down free money) or a higher tax rate that basic in which case the eventual low annuity rate may be offset by the gain made due to the higher rate of tax relief.
for example, last 2 years for a client earning £200,000 plus and is in their 60's.
£100,000 invested, 50% tax relief (so £50,000 net cost); immediately took the PCLS out (£25,000) leaving them with a £75,000 fund that cost £25,000 net. Even with the current s
t annuity rates that makes sense (although will use drawdown when they do take income for some retained death benefits)
for regular folk with basic rate tax it's hard to justify a pension over an ISA
for example, last 2 years for a client earning £200,000 plus and is in their 60's.
£100,000 invested, 50% tax relief (so £50,000 net cost); immediately took the PCLS out (£25,000) leaving them with a £75,000 fund that cost £25,000 net. Even with the current s
t annuity rates that makes sense (although will use drawdown when they do take income for some retained death benefits)for regular folk with basic rate tax it's hard to justify a pension over an ISA
I build portfolios for clients and I'd advise against buying 2 x £500k properties. You're too exposed with a high value property. I'd spread your risk, increase your yield and only buy properties with a discount of 25% off the current value. We don't touch apartments,flats, new builds, just buy props aimed at the working class in decent areas (to keep the repairs and voids low).
I frequently have clients who prefer a hands-off investment so they can enjoy their retirement or get on with their other businesses.
Whilst building their portfolio which takes time, I offer the client a min of 8% return on their excess cash secured by first charge on a discounted property that we buy to refurbish and sell on.
If you want some advice feel free to PM me anytime!
I frequently have clients who prefer a hands-off investment so they can enjoy their retirement or get on with their other businesses.
Whilst building their portfolio which takes time, I offer the client a min of 8% return on their excess cash secured by first charge on a discounted property that we buy to refurbish and sell on.
If you want some advice feel free to PM me anytime!
cerberaperv said:
I build portfolios for clients and I'd advise against buying 2 x £500k properties. You're too exposed with a high value property. I'd spread your risk, increase your yield and only buy properties with a discount of 25% off the current value. We don't touch apartments,flats, new builds, just buy props aimed at the working class in decent areas (to keep the repairs and voids low).
I frequently have clients who prefer a hands-off investment so they can enjoy their retirement or get on with their other businesses.
Whilst building their portfolio which takes time, I offer the client a min of 8% return on their excess cash secured by first charge on a discounted property that we buy to refurbish and sell on.
If you want some advice feel free to PM me anytime!
It's horses for courses and I have no knowledge whatsoever of your area.I frequently have clients who prefer a hands-off investment so they can enjoy their retirement or get on with their other businesses.
Whilst building their portfolio which takes time, I offer the client a min of 8% return on their excess cash secured by first charge on a discounted property that we buy to refurbish and sell on.
If you want some advice feel free to PM me anytime!
However, I do find it a tad amusing that you advise against buying properties but are willing to take clients money and buy the properties yourself
I know it's not as simple as that but that's how it first reads.For clarity also, the £500k property I refer to and own comprises a shop (tenanted by William Hill on a ten year lease) and two flats above, 100m from a main railway station feeding straight into London. Thus a reasonable return on investment.
I would agree that you spread your bets as much as possible, I still however don't see an advantage for annuities (except the bankruptcy one quoted above!). I also wonder what fees are paid to the seller of these annuities?
LeoSayer said:
Boshly said:
I would still have the capital and a growing return and hopefully a growing asset.
It's very likely but there's no certainty. Although the historic trend of property prices and rental returns is definitely on the rise, there's no guarantee and when buying a small number of properties there's the risk of buying just before the start of a slump in the house price/rental market. This could be national or confined to local areas for local reasons.Many people I know who are close to retirement age would't countenance property investment, don't have the knowledge or skills to make a sensible decision and probably don't have the means to get the finance required.
I'm not saying it's a bad idea, just not for everyone and not risk-free.
Also, and I am prepared to be proved wrong, but I would suggest that over the last 50 years there isn't a ten year period where property hasn't risen in value? Even taking on board the recent crash property is now more valuable than 2003. I know it is where I am.
I do agree with the rest of your post though.
Boshly said:
I would agree that you spread your bets as much as possible, I still however don't see an advantage for annuities (except the bankruptcy one quoted above!). I also wonder what fees are paid to the seller of these annuities?
An annuity is just one option available to someone that has built up funds in a pension plan. Now may not be the right time to buy an annuity but if you have built up enough, as in the case of the OP, then you may choose to draw income directly from the pension (Income Drawdown). When comparing this with outright property purchase there is a huge advantage in favour of the pension - tax relief and tax free growth.There is nothing to stop you from investing the pension in a property fund if that's where you see the growth. If it's commercial property that you favour then it's even possible to buy a local property and stick that in the pension - no CGT on any growth.
Fees to the seller of annuities are typically 1% of the fund value but they will vary. It's not the fees that make them bad value its low interest rates.
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