Showing posts with label annuities. Show all posts
Showing posts with label annuities. Show all posts

Sunday 30 April 2017

Intrinsic Value of Preferred Stock

1.  When preferred stock is non-callable, non-convertible, has no maturity date and pays dividends at a fixed rate, the value of the preferred stock can be calculated using the perpetuity formula:

V = D/r

V = value
D = dividend
r = required rate of return




2.  For a non-callable, non-convertible preferred stock with maturity at time, n, the value of the stock can be calculated using another formula.

Value
= PV of Dividends received + PV of Final Selling Price of Preferred Stock
= D1/(1+r)^1 + D2/(1+r)^2 + ....... + F/(1+r)^n




http://www.investopedia.com/articles/fundamental-analysis/11/valuation-prefered-stock.asp

Monday 12 December 2011

Volatile stock markets, low contribution rates and increasing annuity prices will result in a longer working life or less money in retirement in UK.

Your pension will be £1,750 a year less


Private sector workers without gold-plated final salary pensions can expect to receive £145 less a month in retirement than was projected just two years ago.


Pensioners adding up bills - Your pension will be £1,750 a year less
Annuity prices - which dictate your pension income - have increased by an average of 20pc since 2009 Photo: GETTY
Volatile stock markets, low contribution rates and increasing annuity prices will result in a longer working life or less money in retirement.
According to Mercers, the actuarial consultancy, a 50 year-old can currently expect to receive £145 less a month, or £1,740 a year, in retirement income than was projected in 2009. A person in their thirties will be around £100 a month worse off.
The calculations showed that annuity prices – which dictate your pension income – have increased by an average of 20pc since 2009, hampering members' chances of obtaining a good retirement income.
This dramatic increase has meant that someone with a defined contribution pension pot of £200,000 at age 65 can now expect to get an annuity income of around only £5,800 a year, compared with £7,000 a year in 2009. Mercer said that a person nearing retirement might need to work for over three years longer in order to retire on the same income that they expected based on conditions back in 2009.
The decline in prospective pension values has been accentuated by a drop in contribution levels – employees are paying less in than they used to (an average of 4.2pc), while employers have frozen contribution rates, at an average of 7.2pc of a worker's salary, over the past year.
Tony Pugh of Mercer said: "When considering the financial and regulatory pressures pension schemes are facing, the stagnation in employer contributions doesn't come as a big surprise. With a double-dip recession looming things are likely to get worse before they get better.
"We expect, however, that rates will trend upwards again over the long term, as employers start to recognise that lowering contributions to defined contribution schemes will change the workforce profile as a result of older employees having to work longer. Equally, employee pressure to increase contributions is likely to have an impact.
He added: "The impact on individual members is significant, especially for those about to retire. Members should keep a close eye on how their pension pot is invested and make sure to shop around for annuities to get the best out of their retirement savings.
"Those eligible are likely to increasingly use drawdown options, but these are not without risk as investment values could fall."

Tuesday 29 November 2011

Clock ticks down on pension dreams in UK


Only a quarter of fiftysomethings are financially prepared for retirement, but there are steps you can take to catch up.

Cartoon of couple planning pension
Photo: IAN WHADCOCK


Millions of baby boomers now have just a 10-year period in which they can either make or break their retirement plans.
According to new research, seen exclusively by The Sunday Telegraph, only one in four fiftysomethings is financially prepared for retirement and one third have no retirement savings at all. But it is the steps you take in the final countdown to retirement that can have the most significant effect on the size of your eventual pension.
Pension planning has always been particularly important for those in their fifties, but today's fiftysomethings face a series of challenges that no other generation has faced. The research, by US-based insurer MetLife, points out that those in this group have benefited from huge improvements in health and longevity: men retiring at 65 can now expect to live to 82, while women of the same age can expect to celebrate their 85th birthday.
Less positively though, many have seen their pensions and savings squeezed from all sides: company pension schemes have cut back while the value of the state pension has fallen.
But it is private savings that have been hardest hit: those in this age group have suffered a toxic mix of poor investment returns, rock-bottom interest rates and ever-declining annuity rates, so even those who manage to build a decent pension fund find that it secures a smaller income in retirement. MetLife's survey showed that those in their fifties were on average hoping to retire on an income of £18,100 a year.
But six out of 10 of those surveyed said their pension plans had been affected by the recent financial crisis. This problem was particularly acute for those on middle incomes (of between £50,000 and £70,000) and the nearer you were to retirement the more detrimental the effect on a person's retirement plans. Women were also particularly ill prepared for retirement, having on average half the pension savings of men.
Despite these financial problems the majority of those surveyed (60pc) said they had taken no action to change their investment strategy, alter their retirement plans or protect their pension funds.
But there are steps that people can take to improve their pension prospects. Ignoring the problem completely is likely to make it significantly worse.
Peter Carter of MetLife said: "Sadly, the experience of the last two years shows that even those who have done all the right things have still been left struggling. Planning for retirement is one of the biggest financial challenges people face, and the one you can least afford to get wrong."
Below is our countdown to retirement, which, whether you are 10 years or five years away, should help you get your pension planning back on track.

10 YEARS TO GO

– Find out what you are worth
Before you can draw up financial plans for the future, you need a clear view of your current position. Ian Price of St James's Place, the fund manager, said that as a starting point people should establish what their likely state pension entitlement would be. This can be done by completing a form BR19, available at www.direct.gov.uk You should also contact the pension trustees of your current and previous employers, who will be able to provide pension forecasts, as will the companies managing any private pension plans.
– How much money will you need?
Gavin Haynes of Whitechurch Securities said you needed to look at how much income you would need in retirement. Be realistic – you may spend less if you are not commuting to work, for example – but don't forget to factor in holidays, travel and any debts you may still have.
– Seek advice on how to bridge the gap
The chances are that what you are currently on target to receive is less than you'd ideally like. Seek advice about how you can bridge this gap. You need to maximise savings during this 10-year period – not only into pensions but into other investments such as Isas. You will need to consider whether options such as retiring later or working part-time beyond your retirement date may be a more realistic way of meeting your retirement goals.
– Review your investment strategy
It is not only how much you save but where it is invested that can make a difference.
A spokesman for Origen, the pensions specialist, said: "Use this opportunity to carry out an audit of existing pension plans; look at where they are invested, how they have performed and what charges are levied on them. Don't forget to ask whether there are guarantees on any plans."
Get advice about whether it makes sense to consolidate existing pension plans – perhaps via a Sipp (self-invested personal pension) – or take steps to protect capital values. There are a number of guaranteed products that can help you achieve this, but seek advice as many come with higher charges.
As part of your review, look at the diversification of your assets, as this can help protect against sudden market movements. With a 10-year time frame investors need to weigh up the risks of equity investments against safer cash-based products.
Generally, the nearer to drawing your pension you are, the less investment risk you should take. But over this period it is reasonable to include equities within a mixed portfolio, particularly given the very low returns currently available on cash.
Bonds, gilts and some structured products may provide a halfway house between cash and equities – but seek advice about costs and risks.

FIVE YEARS TO GO

– Review retirement goals
Get up-to-date pension forecasts and review your retirement plans. Is retiring at the age you planned still realistic and achievable?
– Take the safer option
Consider moving stock market-based investments into safer options such as cash, bonds or gilts. If there is a sudden market correction now, you may have insufficient time to make good any losses.
– Trace 'lost' pensions and other investments
If you've lost details of a pension scheme and need help contacting the provider, the Pension Tracing Service (0845 6002 537) may be able to help. It has access to information on over 200,000 schemes.
The tracing service will use this database, free of charge, to search for your scheme and may be able to provide you with current contact details. Use this information to contact the pension provider and find out if you have any pension entitlement.
– Maximise savings
You now have just 60 pay packets left until you retire. Save what you can via pensions, Isas and other investments. This, with your current pension pot, will have to produce enough for you to live off for 20 years.
Mr Price said: "Don't forget to consider a spouse's pension. If you have maximised your pension contributions it is also possible to contribute into a partner's pension plan."
He pointed out that higher earners and those in final salary schemes should ensure any additional pension savings didn't breach the lifetime allowance (£1.5m from April 2012) as this could land them with a tax bill. Those with outstanding debts, such as a mortgage or credit cards, should use spare cash to reduce them.
– Consider your retirement options
Don't leave it until the last minute to decide what you will do with your pension plan. Many people fail to consider their options properly and simply buy the annuity offered by their pension provider. This can significantly reduce their income in retirement and there is no second chance to make a better decision.
There are now many more retirement alternatives, from investment-linked and flexible annuities to phased retirement options, as well as the conventional annuities and income drawdown plans. It is worth investigating which is most likely to suit your circumstances.

SIX MONTHS TO GO

– Seek annuity advice
Talk to an adviser about your options; if you are buying an annuity, make sure you shop around for the best rate. Remember that those who smoke or have health problems, even minor ones, should inform the annuity provider as they are likely to get a better rate to reflect their reduced life expectancy.
– Consider deferring retirement
You may qualify for a bigger pension if you defer taking it. If you opt to do this you need to contact the Pensions Service. Those who work beyond their retirement age do not have to make National Insurance contributions. Any additional money earned can still be saved in a pension plan.
– Contact pension providers
Ask how your pension will be paid – and how much it is worth. If you are deferring retirement they will need to be informed.

Wednesday 20 October 2010

Apathy could cost you 20pc extra income in retirement

Annuity rates have slumped alarmingly since the financial crisis and they have just keep falling.
The financial crisis has wreaked havoc on our personal finances, so much so that few areas have escaped.
Shares have been volatile, mortgages difficult to get, while savings rates have been at rock-bottom levels. Yet there is another area that has also been severely hit – annuities.
Annuity rates have slumped alarmingly since the financial crisis and they just keep falling. As at the end of March, a £100,000 joint life annuity for a man aged 65 and woman aged 60, with two-thirds spouse pension and level payments paid, would get you £6,080. Today, it would pay £5,749.
It is little wonder that people are delaying taking their annuity. According to Schroders, more than one in five were delaying taking an annuity because they felt the income returns were poor compared to other investments.
But the financial crisis is not the only thing contributing to lower annuity rates. The other main factor is how long someone will live. The trend is very much for longer lives, which has an adverse impact on rates. Increasing levels of impaired annuities (which pay people a higher income if they have suffered, say, a heart attack) mean that the "poor" lives are not subsidising the "good" lives as they used to.
Those in postcode areas where people live longer are also seeing a rate reduction.
It could also get a lot worse. New European rules could force providers to value annuity liabilities using gilt yields rather than bond yields as they do now. The result, experts predict, will mean an increase in capital requirements, which according to best estimates will reduce rates by between 20pc and 30pc.
The Coalition may have proposed to scrap compulsory annuity purchase but for the vast majority of people, this won't be an option because their retirement pots won't be big enough to pass over the need to lock-in an income level for life.
Yet buying an annuity is, arguably, the most important financial decision you will ever make. If you make the wrong choice it could cost you thousands of pounds in lost retirement income.
It is six years since the Financial Services Authority changed the rules to compel pension providers to inform customers about the open market option – the term given to the right to buy an annuity from any provider you choose.
The hope was that more people would scour the market for a better deal rather than accept the offer from their pension provider. But little has changed. The apathy is a major concern because people could boost their retirement income by as much as 20 per cent simply by shopping around.
One of the problems is that insurers have a vested interest in keeping quiet about the open market option because they do not want to lose business. They may have to tell customers that they can shop elsewhere, but they do not have to (and do not) offer comparisons to illustrate how good or poor their rates are against other insurers.
Add in the cumbersome process of buying an annuity from a company other than your pension provider – delays can leave you without pension income for at least a month – and you have another reason not to use the open market option.
Insurers reckon that most people do know they can shop around, it's just that they get a better deal from their pension provider. Yet financial advisers are not convinced – and
nor, it would seem, is the Government, which wants the industry to justify why the open market option take-up is low.
Advisers still believe that most people, to their cost, just grab the offer from their pension provider. Married people all too often opt for a single-life annuity when buying a joint-life annuity may be the better course of action, while most fail to consider the effects of inflation. Impaired annuities are also overlooked too often.
The golden rule is not just to take the first annuity that comes along. Check whether there are better rates on the "open market'' (look at the FSA's comparative tables on its website). And if you are in any doubt, take advice – annuity rates are not compromised by commission.
You have spent years grafting and saving for retirement. You owe it to yourself not to be hasty and simply tick the annuity box from your pension provider without a second thought.


http://www.telegraph.co.uk/finance/personalfinance/comment/paulfarrow/7975169/Apathy-could-cost-you-20pc-extra-income-in-retirement.html

Friday 26 March 2010

Make sure you have a steady cash flow when you retire

19 Mar 2010, 0139 hrs IST, Lovaii Navlakhi,


Retirement is the time when you hang up your boots from the hustle-bustle of daily life, relax, do your own thing. As we say, it’s time to say: "Goodbye tension, hello pension!” Suddenly, from the risk of dying too young, you have transformed yourself to the category where the risk of living too long exists.

The last thing you want to do is to have your money run out before you do. Risks have to be taken in a controlled manner, and post-retirement returns are thus assumed at 1% or maximum 2% p.a. over inflation. During one’s retirement days, the key requirement is safety, liquidity and tax-free returns. It is important to analyse the pros and cons of some of the avenues available to generate cash flow.

Rental Income 

Apart from a self-occupied property, all other real estate investments are made with the objective of either capital appreciation — like the purchase of land — or to generate return on investment, as in the case of rental property. 2008 has been a rude awakening, and we must prepare for the time when rentals may drop, and the property may remain vacant for a few months. Depending on rental income for 100% of one’s needs may be a risk that needs to be mitigated before heading into the retirement days.

Dividend Income 

A few weeks ago, a client approached me to plan some additional investments for his mother who was a retired senior citizen. He did not want to take risks with the investment and during the course of our conversation, we realised that nearly a third of her income was being received by way of dividends. So, while she was averse to risk investing, she was equally reluctant to reduce her shareholding because she was thrilled with the quantum of dividend that she would receive year on year. In this case, there is a need to reduce the risks that this client carries in her portfolio.

Annuities 

In all our retirement planning calculations, we assume a life expectancy of 85 years for males and 90 years for females. However, no one can say today whether that is an under-estimation or an overkill. To do away with this risk, one can consider purchasing of annuities which are paid for your lifetime, and on your expiry, to your spouse. Obviously, if one was to use this as the only source of retirement income, the quantum required to be invested would be large, so it’s best that about a third of one’s retirement requirement is met through this route.

Fixed Income Investments 

Returns on fixed income investments are normally taxable. For the purpose of planning, it may be best to consider these — like senior citizen bonds, post office schemes, fixed deposits — first so that the income is within tax exempt limit for senior citizens — Rs 2.40 lakh per year as per the latest Budget proposals. Practical examples abound which ensure income that is tax-free and carries minimalistic risk for the senior citizen.

(The author is the Managing Director and Chief Financial Planner of International Money Matters Pvt Ltd)



http://economictimes.indiatimes.com/Personal-Finance/Savings-Centre/Analysis/Make-sure-you-have-a-steady-cash-flow-when-you-retire/articleshow/5699880.cms

Sunday 31 January 2010

Other interesting interest-bearing investments: Mortgage Bonds and Term Annuities

Today a myriad of unit trusts invest in interest-bearing investments.  These include:
  • money market funds,
  • income funds, and,
  • bond funds.

Mortgage Bonds

One of the most attractive interest-bearing investments with a fixed capital value is participation mortgage bonds. 
  • Here you invest in units in large mortgage loans that are granted against the security of a first-class physical asset, for example, commercial, industrial or other property. 
  • Your capital is guaranteed and you earn interest at a competitive rate that can be variable or fixed. 
  • A great advantge is that a participation bond becomes quite liquid after the initial five-year period when you can still enjoy the interest income and withdraw on only three months' notice.
  • (These mortgage bonds caused the subprime credit crisis in 2007-2008 in US).

Term Annuity

A voluntary purchased term annuity is another important investment product from which you can earn a regular income.  It is simply the exchange of a cash lump sum for income, which is paid annually, half-yearly, quarterly or in monthly instalments over a specified period (minimum five years). 
  • This basically means that your original capital is refunded by way of regular instalments together with interest earned on the investment. 
  • You will therefore not get back any capital at the end of the period as in the case of fixed deposit. 
  • A voluntary term annuity can be purchased at any life office and is in essence an insurance contract. 
  • The interest or annuity rate is fixed for the term of the contract, but varies from institution to institution. 
  • This investment product also offers a tax benefit, as you pay tax only on the interest part of your annuity.

Monday 16 February 2009

Classic Question: Annuities or Bonds?

Classic Question: Annuities or Bonds?
Sponsored by by Don Taylor
Saturday, February 14, 2009
provided by

Dear Dr. Don,

I have been considering an immediate annuity, but was wondering what the benefit is over buying a long-term corporate bond or bonds with a similar yield.

Assuming I seek 30 years of income, it seems the annuity is implying something like a 4.5 percent to 5 percent yield. Wouldn't I be better off buying a corporate bond that yields a similar amount? That way, I'd still have the principal to spend at maturity in case I lived longer than planned.

Am I not taking the same default risk with either investment since the insurance company could go out of business just like any other company? And finally, are there tax reasons that would make an immediate annuity better?

-- Laurence Longevity



Dear Laurence,

Yours is a classic question in retirement planning. To restate: "If you can invest at the same yield and the same risk as the immediate annuity, aren't you better off investing in the bonds versus buying the immediate annuity?"

For many the answer will be "no," but making it an apples-to-apples comparison is more difficult than just comparing the interest income from the bonds with the income from the annuity.

In addition, getting the risk levels equal is nigh impossible. State insurance commissions have reserve and other requirements that make an investment in an annuity from a highly rated insurance company safer than an investment in a highly rated corporate bond.

You purchase an immediate annuity with a lump sum and buy an income stream that lasts for your lifetime. The immediate annuity allows you to achieve a higher income stream than you could earn from living off the interest income paid by the bonds. That's because a straight life immediate annuity doesn't return principal when you die, and the annuity only lasts for your lifetime.

There are a multitude of options in how you structure the annuity. You can have it pay over your lifetime, over a joint lifetime or over a set time horizon. The payment can be indexed to inflation. There may or may not be a death benefit to a beneficiary. There may be a guarantee that you or your beneficiaries will at least receive in distributions the amount of money you have invested.

As soon as you start adding options, however, the value of the annuity payment declines because you have spent part of the purchase price to buy that option.

I used the annuity quote function on ImmediateAnnuities.com and assumed a $1 million investment for a 66-year-old male. (The annuity calculator on Vanguard.com is also recommended.) You can do your own calculation based on your age and the money you have available to purchase the annuity. The site will return almost two dozen different monthly payments based on typical annuity options.

I'm going to focus on the straight life annuity, which is the type of annuity that ensures a fixed income for the rest of the purchaser's life. The $1 million purchase secures a monthly income stream of $7,397. If you assume a 30-year life, it equates to a yield of roughly 8.4 percent (assuming the 66-year-old lives to 96). The longer you live, the higher the implied yield on the annuity.

A portfolio of 30-year, single-A rated corporate bonds isn't currently yielding in that ballpark. However, even if the two products were yielding a similar rate, the bonds are riskier than the annuities (for the reasons stated earlier).

I'm going to beg off on the tax discussion between the two investments and leave that to you and a tax professional. However, there's more to consider here than just taxes. Two other considerations are how the choice of an annuity versus the bond portfolio could impact your eligibility for Medicaid and potential estate-planning issues.

The bottom line is that the law of large numbers should allow an insurance company to pay a higher income stream on a single life annuity than you can earn off a similar amount invested in a high-quality bond portfolio.

This is true because the insurance company doesn't have to return your principal if you die sooner than expected, and dealing with a large pool of annuity owners means it can use mortality figures to estimate the average life of that pool to price the annuity.

Annuities are going to make the most sense for people who are worried about outliving their income and don't have a large retirement nest egg as a backstop.

Before signing an annuity contract, get a second opinion on the decision from a fee-only financial adviser. The National Association of Personal Financial Advisors maintains a listing of fee-only advisers.

Copyrighted, Bankrate.com. All rights reserved.

http://finance.yahoo.com/focus-retirement/article/106589/Classic-Question:-Annuities-or-Bonds?mod=retirement-post-spending