Buying a UK annuity

[Kev1964]

For an individual domiciled and tax resident in the ROI, is it an option to buy an annuity in the UK market rather than the Irish market? Rates seem to be significantly higher there at the moment. Accepting the currency risk, the differential is tempting.

This link shows some indicative rates of 6%+ for a 60 year old (single, level) whereas I don’t see anything at or over 5% in Ireland.

Annuity Rates | Annuities | Drawdown | Fixed Term | Pensions

Sharing Pensions at your retirement for best annuity rates, impaired annuity, purchased life annuity, drawdown and fixed term annuities

www.sharingpensions.co.uk

 

[Marc]

That would be a really bad idea. Currency risk kills off any interest rate advantage

Sterling has lost over 1%pa vs the USD since 1955

 

[Kev1964]

That would be a really bad idea. Currency risk kills off any interest rate advantage

Sterling has lost over 1%pa vs the USD since 1955

Thanks Marc - currency risk can work both ways.

Do you know the answer to my question though?

 

[Marc]

Thanks Marc - currency risk can work both ways.

Do you know the answer to my question though?

My understanding is you need to be U.K. resident

 

[Kev1964]

My understanding is you need to be U.K. resident

If that‘s the case I wonder if it‘s a situation that might change going forward?
More market competition is usually beneficial for customers.
Thanks for considering the question.

 

[NoRegretsCoyote]

That would be a really bad idea. Currency risk kills off any interest rate advantage

They’re two sides of the same coin! OP can take a calculated risk but it shouldn’t be a large part of retirement income. Don't forget you pay FX fees on the way in and the way out.

I’ll have about 10% of retirement income in sterling and I'm okay with that.

 

[ClubMan]

If that‘s the case I wonder if it‘s a situation that might change going forward?

Who knows? You're into the realm of pure speculation with that question. Wouldn't Brexit make it less rather than more likely?

 

[Kev1964]

They’re two sides of the same coin! OP can take a calculated risk but it shouldn’t be a large part of retirement income. Don't forget you pay FX fees on the way in and the way out.

I’ll have about 10% of retirement income in sterling and I'm okay with that.

Between my wife and I, we are already in a similar situation (maybe more than 10%). I'm not uncomfortable increasing that.

We also maintain a Stg. bank account and might be happy to let the payments mount up from time to time until the exchange rate is favourable and then do one occasional conversion when it suits. One theory of mine is that the sudden drop in Stg. value that happened in 2016 will recover over time.... making pension payments in Stg. more valuable. But that's all by the by.....

It would be interesting to know with certainty whether any UK annuity providers cater for the euro market. The current differential in my case seems to be c1.5% and on a €500k pot for example, that's €7500 more income pa from the UK annuity market.

 

[NoRegretsCoyote]

We also maintain a Stg. bank account and might be happy to let the payments mount up from time to time until the exchange rate is favourable and then do one occasional conversion when it suits.

I honestly don't think a punter like you or me can time the market. Just focus on minimising FX fees.

It would be interesting to know with certainty whether any UK annuity providers cater for the euro market. The current differential in my case seems to be c1.5% and on a €500k pot for example, that's €7500 more income pa from the UK annuity market.

I am not sure about whether a UK provider would deal with you.

Generally speaking (going back to economic theory), interest rate differentials mean expected inflation is going to be different and, as a consequence, the currency with the higher interest rate will suffer a deprecation. In the short run of course all sorts of different things happen with currency pairs like GBP-EUR.

But Argentina or Turkey or Venezuela all offer high interest rates today, and that's for the above reason!

 

[Allpartied]

One of the options which seems to be popular and widespread in the UK is a Fixed Term Annuity. These products offer a fixed income, over a short period ( 10 years or less) and, at the moment, are quite attactive.
For Example, at age 58, it is possible to buy a 10 year fixed annuity, for 95000 Pounds, which pays out a fixed annual sum of 11906
If you live for the full 10 years, then the total repaid is 119,060, which compares well with the vagaries of an equity based investment.

Unfortunately, Irish companies don't seem to have any such products and the choice is, pathetically, limited to an ARF, or a lifetime annuity.
I guess it is possible to pick an ARF, which is cash based and gives an income based on current deposit rates. However, that would be subject to changes in future deposit rates and the income could not be predicted as accurately.
Is there any reason why Irish companies don't offer products which seem to be available in most other European countries?

 

[Freelance]

Is there any reason why Irish companies don't offer products which seem to be available in most other European countries?

Small market with very limited competition which currently generates a lot of profit for the companies operating here, so little or no incentive to be disruptive and take on the effort, cost and risks associated with launching new products. Easier to sit back and let the profits roll in. Barriers to new entrants include high cost of entry/establishment and regulation. The ultimate solution is for the market to genuinely open up at EU level and allow cross border operation, however there is no sign of this happening.

 

[Dave Vanian]

Agree fully with everything Freelance has said above.

Look at it from the perspective of a player with the financial clout required to offer annuities of any sort...

1. Irish working population - small in global terms
2. Subset of 1. above - those that have pensions
3. Subset of 2 above - those that have pensions that are not DB or public service
4. Subset of 3 above - those that are knowledgeable enough to understand that they might want a fixed-term annuity.
5. Subset of 4 above. Those that evaluate an ARF, lifetime annuity and fixed-term annuity and decide they want the fixed-term annuity.

So 5 above is your target market. Then look at the time and cost of designing your product, jumping through all the hoops required to get it authorised and regulated, marketing etc.

 

[Allpartied]

Agree fully with everything Freelance has said above.

Look at it from the perspective of a player with the financial clout required to offer annuities of any sort...

1. Irish working population - small in global terms
2. Subset of 1. above - those that have pensions
3. Subset of 2 above - those that have pensions that are not DB or public service
4. Subset of 3 above - those that are knowledgeable enough to understand that they might want a fixed-term annuity.
5. Subset of 4 above. Those that evaluate an ARF, lifetime annuity and fixed-term annuity and decide they want the fixed-term annuity.

So 5 above is your target market. Then look at the time and cost of designing your product, jumping through all the hoops required to get it authorised and regulated, marketing etc.

The solution would be for the state to step in and offer fixed term annuities in the form of a State Bond. Very easy to manage with the current state savings infrastructure and would be quite popular, I think.

Of course, the private institutions would shout "unfair competition" and other ideologues would be jabbering about communism or something, but if we are serious about encouraging people to provide additional pensions, from their own savings, then we should be exploring all avenues.

 

[Donal O'Keeffe]

My 1st time joining this forum. Having worked internationally on and off for four decades I would say that it's often an advantage to spread one's pension investments across a number of currencies, say, USD, CHF, Euro and GBP. A mix of annuities and ARFs would also make sense. I have not seen shorter term annuities offered in Ireland, once one purchases an Irish annuity, that's it! No chance to move the unused balance to another investment after 10-years as is the case in other jurisdictions. Investing in multiple AFRs is also worth examining as the flexibility of drawing down tax free lump sums spread over a number of years while allowing more cash to remain invested in tax sheltered ARFs may suit your requirements better than a single ARF. This sort of strategy probably applies from 7-figure pension pots upwards.

 

[Steven Barrett]

The solution would be for the state to step in and offer fixed term annuities in the form of a State Bond. Very easy to manage with the current state savings infrastructure and would be quite popular, I think.

Of course, the private institutions would shout "unfair competition" and other ideologues would be jabbering about communism or something, but if we are serious about encouraging people to provide additional pensions, from their own savings, then we should be exploring all avenues.

It would still be a regulated product, so the State would have to be regulated to provide it. They would also have to run payroll for all the policyholders, employ staff to run the schemes and provide them with DB pensions. All for a very small market...which means it would probably be subsidised by the tax payer.

Ireland is a very small country. We are not going to have the same financial products of other, much bigger countries who have the economies of scale. The UK is 12 times bigger than Ireland. That means they can do a lot more than we can.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[ClubMan]

I would say that it's often an advantage to spread one's pension investments across a number of currencies, say, USD, CHF, Euro and GBP. A mix of annuities and ARFs would also make sense. ...

There is such a thing as too much diversification.
This sounds like potential overkill to me.
A well diversified investment fund will already be diversified by currency, geographic region, market segment etc.

Investing in multiple AFRs is also worth examining as the flexibility of drawing down tax free lump sums spread over a number of years while allowing more cash to remain invested in tax sheltered ARFs may suit your requirements better than a single ARF.

The tax free lump sum is already done by the time that an ARF comes into being. Maybe you actually mean having one's pension pot fragmented into multiple individual pension contracts to give flexibility in terms of staggering the drawdown of tax free lump sums and rolling the remainder into an ARF or annuity?

 

[Fortune]

The solution would be for the state to step in and offer fixed term annuities in the form of a State Bond. Very easy to manage with the current state savings infrastructure and would be quite popular, I think.

Of course, the private institutions would shout "unfair competition" and other ideologues would be jabbering about communism or something, but if we are serious about encouraging people to provide additional pensions, from their own savings, then we should be exploring all avenues.

I'm not sure fixed term annuities would meet revenues requirements for the investment of pension funds. Are those fixed term annuities for personal investment, rather than for pension benefits?

 

[Donal O'Keeffe]

There is such a thing as too much diversification.
This sounds like potential overkill to me.
A well diversified investment fund will already be diversified by currency, geographic region, market segment etc.

The tax free lump sum is already done by the time that an ARF comes into being. Maybe you actually mean having one's pension pot fragmented into multiple individual pension contracts to give flexibility in terms of staggering the drawdown of tax free lump sums and rolling the remainder into an ARF or annuity?

No, I mean investing in a number of ARF type products which are drawn-down in sequence. At the point of initiating the draw-down of an investment, a portion may be taken as a cash lump sum, its my understanding that current tax legislation allows tax free lump sums of up to €200,000 tax free, and up to another €300,000 at 20% tax with an overall cap of €500,000 which is 25% of €2'000,000 maximum tax deductible pension pot. The tax free amounts can be taken over time thereby keeping the funds invested in a product where gains are tax free in comparison to drawing down €500k, paying €60k tax immediately and more tax on the growth of whatever investment the €440k is placed in.

 

[Fortune]

No, I mean investing in a number of ARF type products which are drawn-down in sequence. At the point of initiating the draw-down of an investment, a portion may be taken as a cash lump sum, its my understanding that current tax legislation allows tax free lump sums of up to €200,000 tax free, and up to another €300,000 at 20% tax with an overall cap of €500,000 which is 25% of €2'000,000 maximum tax deductible pension pot. The tax free amounts can be taken over time thereby keeping the funds invested in a product where gains are tax free in comparison to drawing down €500k, paying €60k tax immediately and more tax on the growth of whatever investment the €440k is placed in.

Sounds like you have it a bit mixed up there. You can only put funds into an ARF that have come from a pension fund, and that pension fund would have paid the tax-free lump sum. There's no tax advantage to multiple ARFs. However, your strategy would work with multiple PRSAs.

 

[ClubMan]

No, I mean investing in a number of ARF type products which are drawn-down in sequence.

You can do effectively the same thing if you "fragment" your pension cover into separate contracts. E.g. I have my main pot split into 4 equal PRSA contracts, along wit separate smaller BOB and RAC contracts accumulated along the way, to provide flexibility with regard to staggering pension drawdown rather than it being an all or nothing once off decision.