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Annuities |
At the moment you have to buy an annuity with your pension
fund by the time you are 75.
I have had the feeling they are poor value for a long time but recently I worked out
how I thought the fund would be diminished with age after you bought an annuity and
the insurance company had to manage the fund to pay you an income.
So I looked up the life expectancy of a 65 year old male on the Government Actuarial
Stastistical Table. It says that a 65 year old male could expect to live another 16 years.
Then I looked up some annuity rates and found that a 65 year old male could get an annuity rate of 7.2%.
Suppose you have a fund of £100,000. This buys you an annuity of £7,200 a year.
The insurance company now has your £100,000 and it can invest that money. It should be
able to manage an income of 4.5% by investing in long term gilts.
So in the first year it should be able to earn £4,500 on your money and pay you £7,000.
At the end of one year there is £97,300 left.
The question is, how much money is left after 16 years when, on average, all the males who
bought a pension at age 65 are dead. OK some will live longer but some will die sooner.
16 years is the average.
The answer I get is nearly £39,000. That's nearly 40% of the original fund! So basically,
on average, the insurance company gets to trouser 40% of the pension fund of a man who buys
an annuity at age 65.
Well I'm stunned by that. So stunned I wonder if I've made a mistake. How can it be that
so much of the fund remains for the insurance company. I know they have costs but it can't
cost that much to maintain a pension fund. Once it's set up all they have to do is pay a
monthly pension by standing order and bank the interest cheques they get. I bet that is paid
electronically as well. The only other thing I can think of is to check up you are still alive
so they know when they can trouser your money.
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| Pensions |
| Pensions are just
saving in a particular tax wrapper. As the debate rages keep in mind that there
are other legitimate savings plans that don't require you to lock up your money
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| IR35 |
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these days and now it's really down to getting your story straight and avoiding
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