Question
My wife has a retirement annuity contract with NPI. Over 10 years ago they told her there would be no more annual bonuses. A financial advisor told us to continue with the plan but not to increase contributions because of the guaranteed pension it provided. This was and is currently £3,514 pa at age 60.
My wife was 60 in February and wants to take benefit. Since then and over the past 2 months NPI have provided 4 quotes and each time the tax free lump sum she could take has been less. We have found out, using on-line annuity quotes, that to provide a pension equivalent to the NPI guaranteed pension (i.e. level paid annually in arrears) for a female age 60 would require a fund of at least £68K. However NPI only valued the fund (for tax free lump sum purposes) at £65,871 in early February falling to £64,170 in late March and this has reduced the tax free lump sum she can take. NPI say this is because the "conversion factor" used to calculate this has been falling recently.
She has asked were she can find out what the historic values of the "conversion factor" are but NPI say this is not made available. They have also declined to explain what factors affect its value saying it is determined by the actuaries.
My wife therefore has no idea whether it is sensible to take benefit from her plan now or wait for a time when the "conversion factor" might result in a better tax free lump sum. If you could shed some light on the mysterious factor it would be much appreciated.Answer
Rather than publish an actual pension fund value, it seems NPI takes your wife's guaranteed annuity value and then applies a 'conversion factor' to calculate an equivalent fund value. Establishing a fund value is important when seeking to transfer a pension elsewhere or take benefits, as in your wife's case.
Such conversion factors are broadly calculated to reflect performance of the underlying investment fund but, as you've experienced, it's rather shrouded in mystery and potentially subject to the whims the actuaries who work these things out. I'm surprised NPI won't give your wife details of past rates, but even she could get them I'm not it'd be very useful - as it won't help predict markets (or the actuaries) moving forwards..
Volatile stock markets will not have helped underlying fund performance in recent times, but as the NPI with-profits fund is largely invested in bonds and gilts (which have performed ok) I'm surprised the conversion factor fell so much so quickly.
Given your wife's guaranteed annuity rate doesn't appear to be significantly higher than prevailing rates, it probably makes sense to take the tax-free cash, especially if she's a taxpayer. Aside from being tax-free, the cash gives greater flexibility and reduces the balance 'gambled' on the annuity (I say gambled, as annuities are ultimately a bet with insurers on how long you'll live).
As for the conversion factor, given the state of markets and interest rates I wouldn't expect a dramatic increase, if any, over the next couple of years. If your wife does defer taking the income it would be worth checking that the guarantee will still apply in future and at what rates. If delaying, she'll also need to factor in the income lost meanwhile and the return she could have earned on the tax-free cash.
My wife has a retirement annuity contract with NPI. Over 10 years ago they told her there would be no more annual bonuses. A financial advisor told us to continue with the plan but not to increase contributions because of the guaranteed pension it provided. This was and is currently £3,514 pa at age 60.
My wife was 60 in February and wants to take benefit. Since then and over the past 2 months NPI have provided 4 quotes and each time the tax free lump sum she could take has been less. We have found out, using on-line annuity quotes, that to provide a pension equivalent to the NPI guaranteed pension (i.e. level paid annually in arrears) for a female age 60 would require a fund of at least £68K. However NPI only valued the fund (for tax free lump sum purposes) at £65,871 in early February falling to £64,170 in late March and this has reduced the tax free lump sum she can take. NPI say this is because the "conversion factor" used to calculate this has been falling recently.
She has asked were she can find out what the historic values of the "conversion factor" are but NPI say this is not made available. They have also declined to explain what factors affect its value saying it is determined by the actuaries.
My wife therefore has no idea whether it is sensible to take benefit from her plan now or wait for a time when the "conversion factor" might result in a better tax free lump sum. If you could shed some light on the mysterious factor it would be much appreciated.Answer
Rather than publish an actual pension fund value, it seems NPI takes your wife's guaranteed annuity value and then applies a 'conversion factor' to calculate an equivalent fund value. Establishing a fund value is important when seeking to transfer a pension elsewhere or take benefits, as in your wife's case.
Such conversion factors are broadly calculated to reflect performance of the underlying investment fund but, as you've experienced, it's rather shrouded in mystery and potentially subject to the whims the actuaries who work these things out. I'm surprised NPI won't give your wife details of past rates, but even she could get them I'm not it'd be very useful - as it won't help predict markets (or the actuaries) moving forwards..
Volatile stock markets will not have helped underlying fund performance in recent times, but as the NPI with-profits fund is largely invested in bonds and gilts (which have performed ok) I'm surprised the conversion factor fell so much so quickly.
Given your wife's guaranteed annuity rate doesn't appear to be significantly higher than prevailing rates, it probably makes sense to take the tax-free cash, especially if she's a taxpayer. Aside from being tax-free, the cash gives greater flexibility and reduces the balance 'gambled' on the annuity (I say gambled, as annuities are ultimately a bet with insurers on how long you'll live).
As for the conversion factor, given the state of markets and interest rates I wouldn't expect a dramatic increase, if any, over the next couple of years. If your wife does defer taking the income it would be worth checking that the guarantee will still apply in future and at what rates. If delaying, she'll also need to factor in the income lost meanwhile and the return she could have earned on the tax-free cash.
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