mowatt financial Planning

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Mowatt Financial Planning: June 2011

Tuesday, 14 June 2011

Inflation

May's inflation figures have just been announced today with no change in CPI (4.5%) or RPI (5.2%). Full details are available on the Office of National Statistics site.

Interestingly, Hargreaves Lansdown have done some calculations around index-linked annuities. An index-linked annuity bought with a pension fund will give a guaranteed income for life which is inflation proof. In principle, it's a good idea but as the HL analysis shows there's more to it.

The RPI would need to average 4% over 20 years for an index-linked annuity to match a level annuity. If inflation was 3% it would take 31 years for a 65 year old man. This is probably why index-linked annuities are not that popular when individuals choose their annuity.

Another option which I think can often make sense is an investment linked annuity. This gives the potential to grow income if the underlying funds grow but do not come with an inflation linked guarantee.

In practice, it is sensible to look at the bigger picture and consider all sources of retirement income before making a choice.

Monday, 13 June 2011

Long Term Care Annuities

One of the ways of paying for long term care is to buy an annuity. The price of buying the annuity will take account of the health of the annuitant and can be tax efficient if the payments are made directly to the care home.

The benefits of buying an annuity are that this secures a guaranteed income for life meaning that the estate is protected for the part of the care fees covered by the annuity if the individual ends up paying care fees for a long period of time.

As an example, an annuity costing £100,000 would provide income of £25,378 a year to an 85 year old man with poor memory and balance who requires help with most activities. Clearly if this individual lives for over 4 years the estate will begin to benefit from the insurance provided by the annuity. For a female aged 85 with the same conditions, the annual income would be £18,739.

I recently had a client who had to go into care and it was possible to have the purchased life annuity that she already had paid direct to the care home. This meant that there was no longer any tax to be paid on the income payments.
 
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