Is an Annuity a bad idea ?
Discussion
I am thinking of retiring next year and I am fortunate to have a good DB pension. My wife aged 56 however has no pension and I am thinking of investing 400k so that she is able to have an income in retirement and utilise her tax free allowance. Is it a bad idea to buy an annuity which makes it simple or should I be aiming for a 60/40 Equity/ Bonds split investment instead.
It depends on
How much of an annuity she would get VS how much you think you could realistically generate from investments.
An annuity removes the risk but it also removes the upside.
There are also lots of other factors to consider such as
1. whether you want to leave any money for kids/grandkids
2. what happens if you invest in equities and the bottom falls out of the market
3. If the worst happened could you survive just on your DB pension
4. Does your DB pension give your wife 50% if you pop your clogs before she does
Ive got a reasonably good DB pension but knowing that my wife is only going to get half Ive started saving into a SIPP for for me and her as well. A SIPP for me gets 40% tax relief and chances are she will outlive me so when that happens - she gets
50% of my DB pension
100% of my SIPP
100% of her SIPP
State pension
...which (in my amateur opinion) will make sure she's got a risk free retirement.
How much of an annuity she would get VS how much you think you could realistically generate from investments.
An annuity removes the risk but it also removes the upside.
There are also lots of other factors to consider such as
1. whether you want to leave any money for kids/grandkids
2. what happens if you invest in equities and the bottom falls out of the market
3. If the worst happened could you survive just on your DB pension
4. Does your DB pension give your wife 50% if you pop your clogs before she does
Ive got a reasonably good DB pension but knowing that my wife is only going to get half Ive started saving into a SIPP for for me and her as well. A SIPP for me gets 40% tax relief and chances are she will outlive me so when that happens - she gets
50% of my DB pension
100% of my SIPP
100% of her SIPP
State pension
...which (in my amateur opinion) will make sure she's got a risk free retirement.
bentley01 said:
I am thinking of retiring next year and I am fortunate to have a good DB pension. My wife aged 56 however has no pension and I am thinking of investing 400k so that she is able to have an income in retirement and utilise her tax free allowance. Is it a bad idea to buy an annuity which makes it simple or should I be aiming for a 60/40 Equity/ Bonds split investment instead.
Another factor is how long you think you (or she) will live. When you get the quote, it effectively tells you how long they think you'll live.Thanks for the replies. I do want to leave money to the children but I will try and help them when they really need it rather than just inheritance. We would be able to manage with the DB pension but it will unfortunately have a large chunk taxed at higher rate tax. I will be 58 when I retire and my wife will be 56 and if I cop it she gets half the DB pension.
butchstewie said:
I'd have thought it forms part of a much larger picture that you haven't really given 
Agreed - more information required in order to give a useful answer. To answer a slightly different question - I have seen some folks that take a portion of a DC pot and buy an annuity as part of the mix to provide a guaranteed income to cover the bills - I can see that might make some sense for some folks?
In our case (wife will have a DB pension, I have a (hopefully decent) DC pension), I can't see that I would opt for an annuity to do this as I feel like the DC pot in pot form is worth far more to me than the "comfort" feeling that the annuity would give.
butchstewie said:
I don't think anyone can answer that with the info given can they?
It might be suitable it might be massively unsuitable.
I'd have thought it forms part of a much larger picture that you haven't really given
Would concur entirely much as would be happy to give thoughts. It might be suitable it might be massively unsuitable.
I'd have thought it forms part of a much larger picture that you haven't really given
bentley01 said:
My wife aged 56 however has no pension and I am thinking of investing 400k so that she is able to have an income in retirement and utilise her tax free allowance. Is it a bad idea to buy an annuity which makes it simple or should I be aiming for a 60/40 Equity/ Bonds split investment instead.
1. Probably IMO a bad idea. Presumably your DB pension has benefits for a widow so that side's already covered. She doesn't need an annuity to have income, and why have income when you can have more lightly taxed capital gains instead? Once her state pension kicks in that will use the tax free band on its own.2. Depending on your age and overall situation 60/40 may be old hat. Again, if there's a decent DB coming in you could IMO look at 80/20 or something along those lines. There are no magic answers but 60% of "cautious" may be more safety-net than you need. And in this turbulent world there's no guarantee that fixed interest is still as safe as people used to think it was.
Thanks for the advice and replies. To add more information I will be 58 when I retire in March. I can take the full tax free amount which will be used as top up spending money along side the DB pension. So I guess the question is if you had 400-500 k to invest where would you put it. I’m thinking putting it in the wife’s name due her lack of earnings.
What would be your motivation for taking the entire lump sum? Fear of the tax free element being removed at some point?
Have you done a spreadsheet of your assumed future needs vs income with a few variables like growth rate, inflation, tax etc... It may help you have a clearer picture.
Have you done a spreadsheet of your assumed future needs vs income with a few variables like growth rate, inflation, tax etc... It may help you have a clearer picture.
nickfrog said:
What would be your motivation for taking the entire lump sum? Fear of the tax free element being removed at some point?
Have you done a spreadsheet of your assumed future needs vs income with a few variables like growth rate, inflation, tax etc... It may help you have a clearer picture.
The idea was by taking the tax free sum it reduces the DB amount by about 15K a year which would be all taxed at 40%. I haven’t done a spreadsheet but I assumed reducing higher rate tax would be a good thing.Have you done a spreadsheet of your assumed future needs vs income with a few variables like growth rate, inflation, tax etc... It may help you have a clearer picture.
I'm no expert but I think buying annuities under the age of 60 (unless you smoke 40 a day or.have other life shortening issues) is going to.cost you a packet, current annuities rates are summarised here(assuming 65 years old)
https://retirementexpert.co.uk/pension-drawdown/an...
https://retirementexpert.co.uk/pension-drawdown/an...
Edited by ColinsCornflakes on Sunday 30th August 20:52
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