What happens to the annuity lump sum?
Discussion
Sorry for being a bit dozy but what happens with the lump sum from an annuity when you die ?
I have been with my IFA today and he is saying one of the options I should consider is an annuity
My initial thoughts were that annuities had done their time but some searches would suggest I don’t know anything.
Also what kind of rate should I expect for £100k. Age 61 not in great health although never smoked.
I am a bit concerned that you die after a few years then who takes the money.
Also do you just take the interest each month / year or do (should) you take some of the capital so the pot reduces
I maybe should have asked the IFA but I had so many different things going on.
The lump sum is the remains of the tax free amounts from pension pots after we have done ISAS
Thanks
I have been with my IFA today and he is saying one of the options I should consider is an annuity
My initial thoughts were that annuities had done their time but some searches would suggest I don’t know anything.
Also what kind of rate should I expect for £100k. Age 61 not in great health although never smoked.
I am a bit concerned that you die after a few years then who takes the money.
Also do you just take the interest each month / year or do (should) you take some of the capital so the pot reduces
I maybe should have asked the IFA but I had so many different things going on.
The lump sum is the remains of the tax free amounts from pension pots after we have done ISAS
Thanks
In some ways you can think of an annuity as being the reverse of a life assurance policy. With a life assurance policy you could have a sum assured of £100K and if you die after paying the first premium the insurer is on the hook for a big loss. Anuities work in the opposite way in that you buy a guaranteed income with a lump sum and the actuaries work out how long they think you are going to live, the return that they will get on investments and work out how much they can pay you each year until you die.
If you live longer than they expect you get a better return. If you die early the insurance company win.
You can buy some guarantees such as that if you die in the first five years the remaining payments that would have been made in that time will be paid to your estate. You can also choose an option such that the income increases by an agreed amount each year. Bear in mind that any such options cut the initial yearly payment.
The older you are when you start to take income from an annuity the higher the income would be. If you have health problems which might mean that your life expetancy is compromised it is probably worth asking your IFA which annuity providers give better rates for your conditions.
If you live longer than they expect you get a better return. If you die early the insurance company win.
You can buy some guarantees such as that if you die in the first five years the remaining payments that would have been made in that time will be paid to your estate. You can also choose an option such that the income increases by an agreed amount each year. Bear in mind that any such options cut the initial yearly payment.
The older you are when you start to take income from an annuity the higher the income would be. If you have health problems which might mean that your life expetancy is compromised it is probably worth asking your IFA which annuity providers give better rates for your conditions.
xeny said:
It remains with the annuity provider. No money back to your estate.
This. Think of it this way. You have a lump sum. You want a regular income.
So you use your lump sum to buy a regular income. The amount of regular income that your lump sum buys you is (more or less) based on a prediction of when you’re likely to die, and a prediction of how much money can be made from the lump sum if invested.
You’re betting that you outlive the prediction, and so make a good bargain. The counterparty who takes your lump sum and gives you the regular income in return is betting on you not outliving the prediction, and on beating the predicted investment performance of the lump sum, as that’s profitable for them (well, even more profitable than the predictions, each of which have a slice of profit built into them).
Your lump sum ( the total pension fund value) is exchanged for an income for life and as such will cease to exist.
Note that there are any number of options to include tax free cash & reduced income, guarantee periods, provision for spouse.
Some older retirement annuity contracts have a guaranteed annuity set at outset. These can be valuable.
Older Norwich union (Aviva) personal pensions (f prefix from memory) can contain guaranteed annuity rates in double figures. Again valuable given current rates.
Note that there are any number of options to include tax free cash & reduced income, guarantee periods, provision for spouse.
Some older retirement annuity contracts have a guaranteed annuity set at outset. These can be valuable.
Older Norwich union (Aviva) personal pensions (f prefix from memory) can contain guaranteed annuity rates in double figures. Again valuable given current rates.
You can protect against early death either with a long guarantee period or value protection.
The maximum guarantee period available is 30 years. If you live at least that long the income dies with you, unless it's joint life and the second annuitant is still alive. If you live less than 30 years it carries on paying out the income until the 30 years have elapsed. For someone aged 60 it's less expensive than you might think for a 30 year guarantee and it can ensure that one way or another you actually get back more than you paid for it, possibly around 60-70% more at the moment.
Value protection is available up to 100% of the purchase price. This works by paying a lump sum on death equal to the purchase price, less total payments to date. The lump sum is paid to your estate and potentially liable to inheritance tax.
You're buying the surety that the income won't run out and getting someone else to take the longevity risk. With the above you can have peace of mind that you/your family won't lose out.
If you try and spend at the same rate from investments you'll likely have to eat into capital as well as the income produced. Then it can become a downward spiral where you don't know when you'll die.
You can also buy an annuity with cash not inside a pension. Then the majority is deemed to be a return of your capital so you only pay income tax on the smaller interest component.
Maybe not such a bad idea after all...
Your adviser should really have explained all this.
The maximum guarantee period available is 30 years. If you live at least that long the income dies with you, unless it's joint life and the second annuitant is still alive. If you live less than 30 years it carries on paying out the income until the 30 years have elapsed. For someone aged 60 it's less expensive than you might think for a 30 year guarantee and it can ensure that one way or another you actually get back more than you paid for it, possibly around 60-70% more at the moment.
Value protection is available up to 100% of the purchase price. This works by paying a lump sum on death equal to the purchase price, less total payments to date. The lump sum is paid to your estate and potentially liable to inheritance tax.
You're buying the surety that the income won't run out and getting someone else to take the longevity risk. With the above you can have peace of mind that you/your family won't lose out.
If you try and spend at the same rate from investments you'll likely have to eat into capital as well as the income produced. Then it can become a downward spiral where you don't know when you'll die.
You can also buy an annuity with cash not inside a pension. Then the majority is deemed to be a return of your capital so you only pay income tax on the smaller interest component.
Maybe not such a bad idea after all...
Your adviser should really have explained all this.
gotoPzero said:
What sort of rate have they offered you?
Hi hadn’t got as far as that. I had a meeting with my IFA and it was a possible suggestion. I kinda gave the impression That I understood but when I started looking it was clear I didn’t. The meeting was quite a long one as we had a lot to go through so just started doing a bit of research and will pick up next time I speak with the IFA
BenB91 said:
Why not ask your IFA? A person who is qualified to give advice and accurately answer your questions. Rather than random unqualified people on the Internet.
Because I thought I was much better getting unqualified advice from a no mark like you off the internet. And to be fair you have proved me right with your stupid reply. You cock
Sogra said:
Because I thought I was much better getting unqualified advice from a no mark like you off the internet. And to be fair you have proved me right with your stupid reply.
You cock
Relax hun. You cock
It was a serious response. You are paying your IFA a fee, let them work for their money and provide informed information. They know what they are talking about, whereas you may receive the wrong information on here which leads you down the wrong path and possibly a poor outcome.
darreni said:
Your lump sum ( the total pension fund value) is exchanged for an income for life and as such will cease to exist.
Can someone explain to me why someone would choose to purchase an annuity over drawing down the income?Unless of course you are certain you are going to live to be 100?
Joey Deacon said:
darreni said:
Your lump sum ( the total pension fund value) is exchanged for an income for life and as such will cease to exist.
Can someone explain to me why someone would choose to purchase an annuity over drawing down the income?Unless of course you are certain you are going to live to be 100?
Currently an annuity rate for a 65 year old would be paid back in around 15 years (on the assumption it's level paying, i.e. doesn't increase each year). So from age 80 onwards, you are in "profit" zone. Life expectancy for most people is late 80s, so it's not such a daft idea.
At the risk of also getting my head bitten off (no need for that by the way, it was one of the most sensible answers you have had so far), you really need to be asking your IFA this sort of question.
They should be able to explain that you can include a spouse's annuity or have the annuity protected or include a guaranteed payment period which would make sure that something pays out to your next of kin in the event of your death. These things cost money so expect any/all of them to reduce the annuity level slightly, however nowhere near as much as including indexation on the annuity, indexation massively reduces your starting level of income.
If you are in poor health then you may qualify for an enhancement and as such receive a higher than standard annuity, again your IFA should be able to advise on this.
Buying an annuity means you exchange the lump sum for a regular payment, in most cases you no longer have access to the pot of money you have exchanged but you have the benefit of a guaranteed income, normally for the rest of your life. As has been pointed out it provides a level of income security and guarantee generally not offered by drawing an income from an invested pension pot (i.e. income drawdwn).
They should be able to explain that you can include a spouse's annuity or have the annuity protected or include a guaranteed payment period which would make sure that something pays out to your next of kin in the event of your death. These things cost money so expect any/all of them to reduce the annuity level slightly, however nowhere near as much as including indexation on the annuity, indexation massively reduces your starting level of income.
If you are in poor health then you may qualify for an enhancement and as such receive a higher than standard annuity, again your IFA should be able to advise on this.
Buying an annuity means you exchange the lump sum for a regular payment, in most cases you no longer have access to the pot of money you have exchanged but you have the benefit of a guaranteed income, normally for the rest of your life. As has been pointed out it provides a level of income security and guarantee generally not offered by drawing an income from an invested pension pot (i.e. income drawdwn).
Joey Deacon said:
darreni said:
Your lump sum ( the total pension fund value) is exchanged for an income for life and as such will cease to exist.
Can someone explain to me why someone would choose to purchase an annuity over drawing down the income?Unless of course you are certain you are going to live to be 100?
Meet with IFA and don't ask a bunch of rather important questions that they're really well placed to answer.
Ask random people on the Internet and when one suggests perhaps you should ask your IFA you call them a cock.
Way to go with encouraging people to help you.
You've got to wonder sometimes.
Ask random people on the Internet and when one suggests perhaps you should ask your IFA you call them a cock.
Way to go with encouraging people to help you.
You've got to wonder sometimes.
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