Annuities - are they really this bad?
Discussion
I'm starting vaguely to think of retiring, and I just did a quick Google for annuity calculators. Based on a 55 year old purchasing an annuity with £100,000, it looks like I could expect an income of just £200 per month, or to put it another way in order to give me an income for the rest of my life, they expect me to pay enough money to pay the first 500 months ( or until I'm 91) myself.
My first thought is 'sod that for a game of soldiers, I'll just stick the money in a savings account and live off it myself', but what am I missing here?
My first thought is 'sod that for a game of soldiers, I'll just stick the money in a savings account and live off it myself', but what am I missing here?
We've got near enough record low interest rates, and annuities are always invested in very safe, low yield investments, as the emphasis is on making sure there's enough to keep paying you a regular income, rather than on growing the size of the pot/your payments.
The other big problem is that you're only 55! Realistically, you can be expected to live until you're 85 quite comfortably. Current male life expectancy in the UK is 79.5 years on average, but obviously that includes people who die in childhood etc, so by the time you've got to where you are, you've not likely to pop your clogs at 60.
Take £100k. Divide it by 30 (years) and then by 12 (months) and you get to something like £277 per month.
If you worked for another 10 years, you'd probably double your monthly income in retirement.
Unless you've been putting an insane percentage of your salary into your pension pot, it's simply not reasonable to expect to be able to live 30 years in retirement.
The other big problem is that you're only 55! Realistically, you can be expected to live until you're 85 quite comfortably. Current male life expectancy in the UK is 79.5 years on average, but obviously that includes people who die in childhood etc, so by the time you've got to where you are, you've not likely to pop your clogs at 60.
Take £100k. Divide it by 30 (years) and then by 12 (months) and you get to something like £277 per month.
If you worked for another 10 years, you'd probably double your monthly income in retirement.
Unless you've been putting an insane percentage of your salary into your pension pot, it's simply not reasonable to expect to be able to live 30 years in retirement.
Yes, I take your point, I suppose I was wondering why, given as you say my life expectancy is around 80 to 85 they were expecting me to stump up enough dosh to pay until I'm 90? I thought the whole point of insurance-backed annuities was that they amortised the risk over large populations, here it looks like I'm paying all the risk premium myself.
Kermit power said:
it's simply not reasonable to expect to be able to live 30 years in retirement.
I don't think the OP is saying he expects an income to live off for 30 years. I think his point is that he would have to live beyond the average life expectancy of an annuitant just to get his original amount back i.e. annuities offer poor value. There was a thread about this not too long ago, but I agree with the OP - buying an annuity currently looks very unfavourable. On the rates he is quoting he would be better off simply investing in gilts and taking £200 per month income from it. The capital would be largely protected and would have something left for his estate when he died.
With the recent pension changes, many individuals (and their estates) would be far better off self-managing their retirement income - IF they had the intelligence to do this appropriately. Annuities take the responsibility and risk out of retirement income, but at a very great cost.
Gaspode said:
Yes, I take your point, I suppose I was wondering why, given as you say my life expectancy is around 80 to 85 they were expecting me to stump up enough dosh to pay until I'm 90? I thought the whole point of insurance-backed annuities was that they amortised the risk over large populations, here it looks like I'm paying all the risk premium myself.
I'm not saying that annuities aren't crap, and I certainly wouldn't buy one if I were able to retire now, but there is more to consider here.1. You might drop dead tomorrow, but you might live to be 100, at which point it won't seem like a bad deal! I don't know what the life expectancy is for someone who has already made it to 55, but you can be certain that the annuity company's actuaries do.
2. Many annuities give index-linked payments, so it's not as simple as "take the starting monthly payment and mulitply by x", as your £200 will go up regularly. If you look back over the last 5 years or so, how many truly safe investments have managed to even keep track with inflation, much less beat it? Not many, I'd think.
3. Was this deal just for you, or did it include a continued payment after your death for your wife, assuming you have one?
Look at a fixed term annuity as tax treatment is way better as its treated as return of capital for the most part rather than income. I forget exactly what the product its called. But I don't think anyone should ever buy an annuity.
Worse case buy a deferred one to start from the month after your expected date of death
Worse case buy a deferred one to start from the month after your expected date of death
PurpleMoonlight said:
If the Government do what they say they are going to do, you won't have to buy a annuity, or an annuity 'based' product, from April 2015.
You will be able to draw whatever income you want from your pension fund.
I reach 65 at the end of November so does that mean I'm stuck with having to buy an annuity? I've been paying into a personal pension plan since I was in my 20s - not a lot, but all I could afford. Now it looks like I'm about to be shafted by having to buy something I'd prefer not to. Can I wait until April 2015 before drawing on it?You will be able to draw whatever income you want from your pension fund.
Riley Blue said:
I reach 65 at the end of November so does that mean I'm stuck with having to buy an annuity? I've been paying into a personal pension plan since I was in my 20s - not a lot, but all I could afford. Now it looks like I'm about to be shafted by having to buy something I'd prefer not to. Can I wait until April 2015 before drawing on it?
I would imagine that depends on your particular pension plan?I already have a pension and get rental income from a property. The 100k is what would remain if I dissolve my company and pay the 10% entrepreneurs' tax.
Being extremely risk-averse when it comes to money, I was looking for a safe return. I'm now thinking that even National Savings Income Bonds would be better - half the return, but the 100k is still mine and I could take it out without penalty if I needed it.
Being extremely risk-averse when it comes to money, I was looking for a safe return. I'm now thinking that even National Savings Income Bonds would be better - half the return, but the 100k is still mine and I could take it out without penalty if I needed it.
Riley Blue said:
I reach 65 at the end of November so does that mean I'm stuck with having to buy an annuity? I've been paying into a personal pension plan since I was in my 20s - not a lot, but all I could afford. Now it looks like I'm about to be shafted by having to buy something I'd prefer not to. Can I wait until April 2015 before drawing on it?
You should be able to transfer to a drawdown product and take capped drawdown until unlimited drawdown is available.Talk to your IFA.
You no longer have to buy an annuity. You can effectively draw as much of your pension as you want until it runs out, if you so wish. You can take 25% out tax free at the start, and the rest you pay tax on as you daw it out.
Pensions got a whole load more flexible in the last Budget.
Pensions got a whole load more flexible in the last Budget.
Riley Blue said:
I reach 65 at the end of November so does that mean I'm stuck with having to buy an annuity? I've been paying into a personal pension plan since I was in my 20s - not a lot, but all I could afford. Now it looks like I'm about to be shafted by having to buy something I'd prefer not to. Can I wait until April 2015 before drawing on it?
Most of the annuity providers have launched a product for people like you who are retiring during the transition.Shop around, most now do a 1 year product to cover this period.
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