Death of the Retirement Annuity
When retirement approaches, this often brings into focus what regular income and possible one-off expenses you are likely to face in the foreseeable future. What’s your budget? It can be useful to break this down into different types of expenditure, I often refer to essential spend, maintaining lifestyle, preparing for the unexpected and passing on your wealth. I will concentrate on the essential spend aspect of providing for an income in retirement.
I would label essential spend as items such as utility bills, council tax, food, clothing, required insurances and the cost of running a car. In our experience, this is usually around £1,500 per month (£18,000 per year). Once you have covered the absolute necessities, you can potentially afford to take on an element of risk with your other savings, pensions and investments.
Lifetime Annuity Considerations
Another important consideration is how long will this annuity needed for? Average life expectancy statistics suggest that males aged 65 will live to 83 years 7 months and females slightly longer to 86 years, so around 20 years. This is based upon the whole of the UK. For our clients, predominantly in the south of the country, life expectancy could be considerably longer.
In addition, consideration needs to be given to the fact that every year prices tend to increase as an effect of inflation. As an example, in 1999 a litre of unleaded petrol would have cost 62.90 pence2 compared to the current average price of £1.28 per litre, the cost having nearly doubled over twenty years.
As the name suggests, essential spend is exactly that, so having in place a secure stream(s) of income to meet this need represents effective planning. So, where might this income come from? The full State Pension is currently £168.60 per week (£8,767 pa), this comes with an increase of 2.5%, National Average Earnings or Consumer Price Index per year, whichever is the highest. Often our clients will still have final salary pensions that will come into payment. In our example, let’s assume a pension of £4,000 per year (again this is likely to be indexed). We have an income gap, in our pocket, of £5,200 approx. per year that is £18,000 pa less £8,767.20 less £4,000. Unfortunately, we need to account for income tax, so our shortfall is likely to be around £6,600 per year.
Deemed as unpopular, due to perceived poor value for money, a lifetime annuity will satisfy this demand/shortfall. What an annuity does provide is:
- Security of income for life
- No investment risk
- No requirement for annual reviews
- No on-going expense
- The ability to add in an on-going income for dependants or loved ones
To provide a stream of income of £6,600 per year for life would require a pension fund of £143,000 approx. (a non-escalating income, single life and guaranteed for 10 years minimum).
Once your essential spend has been secured, the more exciting aspects of financial planning under the heading of “maintaining lifestyle” can start to be addressed in the knowledge that whatever happens you have broadly covered your fundamental requirements. For clarity, exciting planning might include weekend breaks away, overseas holidays, running two cars, eating out etc.
So, in summary, the staid, boring, old lifetime annuity may well provide a key building block to significant excitement in maintaining your lifestyle in retirement.
For assistance in planning an informed retirement, please speak to one of our highly experienced financial planners.