At age 54, I have accumulated over £290,000 in various pension funds.
My plan is to take early retirement and possibly continue with some
consultancy work. I quite like the thought of taking
tax-free cash now
but will need only a modest level of income in the short term.
I take an active interest in investments and most of mine are planned to
mature in 10 years or so. While my health is not too good (two heart
attacks in the last five years), I think I am too young to buy an annuity.
What should I do?
At 54, you may consider yourself too young to purchase an annuity. Many
people consider them to be poor value for money currently. But don't be too
dismissive as they do provide a guaranteed stream of gross income for life
even if, in many other respects, they are a little inflexible.
As someone who might be described (excuse the industry jargon) as an
“under-average life”, you can benefit from improved annuity rates as a
result of your increased mortality risk. Even leaving that aside, it is
possible to purchase a unit-linked or with-profits annuity where future
income is linked to ongoing investment returns.
Although you wish to consider alternatives to annuity purchase, we can
conveniently use that option as a comparative reference point.
Investment risk: Depending on the selected investments, the capital value
of your pension fund might go down rather than up. The future value of the
fund may not be able to provide you with an appropriate level of income.
Interest or annuity rate risk. As you get older, annuity rates tend to be
higher. But with increased life expectancy and falling long-term gilt
yields (on which annuity rates are based), there is no guarantee that
future rates will be better than they are today.
Mortality drag. Put simply, if you delay buying the annuity, you miss out
on some of the profit inherent in annuity rates as a result of some
annuitants dying sooner than expected. Sounds bizarre but it is not to be
You must also take into account that you will have to pay charges to keep
the pension fund invested.
You can retain complete investment control and, typically, a Sipp is going
to be cheaper than a conventional insurance product, with explicit fees
charged by the provider and IFA rather than commission payable to the IFA
by the provider.
Remember to review the plan on a regular basis, at least yearly, and
adjust the chosen investments over time to reflect the needs of the fundand
your changing attitude towards risk/reward and volatility.
With a conventional annuity, provision can be made for a surviving spouse
to continue to receive an income, with a consequential reduction in the
starting income for you. It may also be possible to guarantee an income for
a minimum number of years.
With more than £21bn in Tessa funds maturing this year, the
Tessa-only Isa market has become
huge. But it is unlikely that investors will get more than 5 per cent on
average from variable-rate Toisas.
A much better alternative for most investors is a very popular product
called Tessa Triple Plus issued by NDF in association with Credit Suisse
First Boston. Many IFAs have quite rightly recommended it to their clients.
NDF and CSFB are now issuing a new tranche on terms which were agreed
before the base rate cut on May 10. It is linked to the FTSE 100 index and
pays up to 20 per cent growth in any one year over a five-year period so
there is a potential for 100 per cent tax-free growth.
Unlike most stockmarket-linked plans, it provides 100 per cent capital
security at all times.
With nearly all forecasters expecting the FTSE 100 to rise by at least 10
per cent from current levels, with some predicting gains of 20 per cent or
more over the next 12 months, this looks to be an extremely sensible
investment at current levels.
Two other points worth noting are that, in addition to the investor's
maturing Tessa capital of £9,000 being invested, another £3,000
can be invested in a mini cash Isa. Also, even if investors have already
transferred their existing Tessa into a Toisa, they can transfer at any
time into Triple Plus.
At present, the highest fixed-rate Isa available is only 6.1 per cent from
Northern Rock Building Society while the highest variable-rate Tessa is 6.5
per cent from Portman Building Society. I expect both rates to fall shortly.
With no risk to capital and a far higher potential return than
conventional Toisas, Tessa Triple Plus is a must for all realistic
investors and even for those who are risk-averse. Three per cent commission
is paid to IFAs.