I hope to retire next year at 60. I will have a modest occupational pension. My wife also has a modest pension and will receive the old-age pension soon. We have accumulated some investments over the years, worth about €600,000, which are doing okay. Would it be possible to use this money to purchase an annuity for life and, if so, what type of return could we expect?
Mr B.M.
We get a lot of queries from people looking at how best to manage the transfer of their pension savings into retirement income but I have to say this is the first time I have ever come across anyone looking to purchase an annuity with ordinary savings.
Your situation is not one that appears anywhere in the literature that I have tracked down and no one I spoke to was able to answer the question straight off. Why? Well, it is so unusual that someone would not avail of the tax relief available on pension savings and then look to lock that money away in a retirement income option.
Anyway, following investigation by a couple of specialists in the field, it emerges there is nothing to stop you purchasing an annuity with ordinary savings. This is not surprising really, in that you are not “gaming” the system – if anything you have forgone significant tax relief on those savings that would have been available to you.
Whether it is a good idea is a separate issue. Annuities are tied into bond yields and these are currently bumping along at historic lows – meaning that you will get less retirement income per €1,000 of savings than you would have in a more normal bond-yield environment.
I’d like to say that this is purely a temporary blip but then I thought it was that several years ago when annuity rates first started diving to unprecedented low levels.
At this stage, annuities are in a prolonged period of very poor return and, unless there is a strong need to lock in income for some reason, it would be difficult to find a financial adviser that would unequivocally suggest you do so.
This is even more so given that you both have occupational pension coverage, albeit modest, and recourse to the State pension in time. While your pension may be modest, your return in an annuity will be decidedly modest.
As of now, for someone retiring at usual pension age, if you were to get a 4.5 per cent annuity on a standard basis – ie the pension is paid to you and stops when you die – that would be as good as it gets. On your €600,000 you might get €27,000 income per annum. That amounts to €2,250 a month, or just under €520 a week.
The figure above is based on someone retiring at 65/66. As you are looking to retire at 60, rather than 65/66, the figure you receive would certainly be lower.
Assuming your income is in excess of the income exemption limit, you would be liable to income tax and universal social charge on that income.
Of course, I am assuming you want this nest egg to take care of you both. Again, assuming you were 65 to begin with, the 4.5 per cent annuity would fall to about 4 per cent if you wanted to leave an income of half the original annuity amount for the surviving spouse.
That would give you an initial income of €24,000 per annum, falling to €12,000 per annum for the surviving spouse.
An even bigger issue is the price of allowing for inflation. There is no quicker way to reduce the value of your pension in real terms than to fail to make provision for inflation. While Ireland has seen no real inflation in recent years, the European Central Bank and other state agencies tend to crunch their numbers on the basis of inflation of about 2 per cent.
An example provided by one of the larger pension providers suggests that your 4.5 per cent standard annuity would drop to about 2.5 per cent if you were allowing for a survivor’s pension and “escalation” – ie an annual increase to allow for inflation – of 3 per cent.
That brings the annuity income from your €600,000 pot down to about €15,000 per annum (€7,500 for any surviving spouse).
As I said, given that you are retiring at 60, the figures would be even worse.
Those are pretty scary numbers from a substantial savings pot and I would strongly suggest that you should consult an independent qualified financial adviser (not an agent tied to one of the life insurance houses) before making any such move.
Any move on relief for SL investors?
Were you able to establish how more than 5,000 letters to the one address were delayed and the reason. Standard Life has abandoned doing anything more than writing a few letters and Michael Noonan does not want to do anything either.
Mr T.O’M., email
The investigation into the events surrounding the Standard Life return-of- value fiasco has been managed by the company, as you would expect. This column can do little more than raise the profile of the issue, put pressure on the company to come up with some answers on how it happened and ensure shareholders are kept informed of developments as they arise.
To be fair, Standard Life has invested a fair amount of time and effort in trying to figure out what happened. It was clear – from its perspective – from the outset that the return of value could not be reopened. People therefore were stuck with the manner of payment they received unless Revenue here could be persuaded to show flexibility once it emerged there had been a problem through no fault of those 5,300 shareholders.
Revenue has stated that it has no discretion in this. That is also not surprising. If it was open to chopping and changing rules to suit individual circumstances, taxpayers would be the first to cry foul.
That leaves us with Mr Noonan. The Minister for Finance acted last year in similar circumstances to ensure Irish shareholders in Vodafone were not out of pocket. He says he is not minded to do the same this time around although he has not shut the door completely, saying he will continue to listen to his advisers on the issue.
On where exactly the problem occurred, all Standard Life can say is that it was either within Royal Mail or An Post – or both. Neither can be any more detailed.
Personally, I find it strange that no UK-based shareholders had similar problems. I also find it strange that the problem is identical to the one that afflicted Vodafone shareholders last year – even though the Vodafone letters were going to Bristol and the Standard Life ones, if memory serves, were being dealt with in Kent, on the other side of England.
It is possible that the problem was with whatever Royal Mail depot deals with mail flying in from Ireland but, in my view, the more likely factor is some glitch on the An Post side. Certainly, there were plenty of mixed messages given to Standard Life shareholders from An Post staff at the time.
So what now? I think it is unfair to say Standard Life has done no more than write a few letters but it is the case that the company has now decided it has run out of options. On that basis, the only practical measure that I can see is to pressure the Minister / Department of Finance to step in at the budget.
I have been asked several times whether any action group has been formed to organise this. I don’t know but I certainly have no details on any such effort. If one exists and sends in details I will publish them for others interested in getting involved.
With an election in the offing and more than 5,300 families affected, I wouldn't say the game is played out yet. Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.
