Annuity - Am I missing Something
Discussion
Im considering an annuity with one of my pensions. After taking tax free cash, Ill have approx 470K to buy the annuity.
The return is a bit under 18K a year, so if I lve another 25 years, that's 450K.
(illustration is a 10 year guaranteed period, 66% spouse pension, level annuity)
So theyre just drip feeding my own money back to me and If I and and the Mrs peg it early, they keep the balance.
Why would I do this? I'd better off investing it with an insurance company with a flex drawdown and maybe make a bit if its invested sensibly?
Thanks
The return is a bit under 18K a year, so if I lve another 25 years, that's 450K.
(illustration is a 10 year guaranteed period, 66% spouse pension, level annuity)
So theyre just drip feeding my own money back to me and If I and and the Mrs peg it early, they keep the balance.
Why would I do this? I'd better off investing it with an insurance company with a flex drawdown and maybe make a bit if its invested sensibly?
Thanks
An annuity is less attractive now that you have options and you could invest the money yourself and drawdown (take pension withdrawals in parts).
However, the annuity I presume would be inflated each year so if you are making your own investments you need to account for inflating your income each year.
Secondly, it takes all the risk out of the equation. If you were 15 years into drawdown of your own pension and the market took a big crash, there is a risk that your planned forecast of 10 more years might end up 8 years of funds left. With an annuity, the annuity company has to cover the cost of the crash.
The cost of the convenience and low risk option is that it is expensive i.e. on average life span, you wouldn't live (say) 25-30 years in retirement which is the normal time it takes to be break-even.
However, the annuity I presume would be inflated each year so if you are making your own investments you need to account for inflating your income each year.
Secondly, it takes all the risk out of the equation. If you were 15 years into drawdown of your own pension and the market took a big crash, there is a risk that your planned forecast of 10 more years might end up 8 years of funds left. With an annuity, the annuity company has to cover the cost of the crash.
The cost of the convenience and low risk option is that it is expensive i.e. on average life span, you wouldn't live (say) 25-30 years in retirement which is the normal time it takes to be break-even.
leef44 said:
An annuity is less attractive now that you have options and you could invest the money yourself and drawdown (take pension withdrawals in parts).
However, the annuity I presume would be inflated each year so if you are making your own investments you need to account for inflating your income each year.
Secondly, it takes all the risk out of the equation. If you were 15 years into drawdown of your own pension and the market took a big crash, there is a risk that your planned forecast of 10 more years might end up 8 years of funds left. With an annuity, the annuity company has to cover the cost of the crash.
The cost of the convenience and low risk option is that it is expensive i.e. on average life span, you wouldn't live (say) 25-30 years in retirement which is the normal time it takes to be break-even.
Thanks for that = the quote as I mentioned is a lvel annuity do theyre not having to work for it!However, the annuity I presume would be inflated each year so if you are making your own investments you need to account for inflating your income each year.
Secondly, it takes all the risk out of the equation. If you were 15 years into drawdown of your own pension and the market took a big crash, there is a risk that your planned forecast of 10 more years might end up 8 years of funds left. With an annuity, the annuity company has to cover the cost of the crash.
The cost of the convenience and low risk option is that it is expensive i.e. on average life span, you wouldn't live (say) 25-30 years in retirement which is the normal time it takes to be break-even.
After you die, 25 years in your example, you need to consider the 2/3rds your wife gets for a further how long?
The bet is open ended and risk free for you & your spouse. So look at it from that perspective if you were on the other side of the trade.
A further thought to ponder, in order to have a 90% chance of your pension funds lasting throughout your life in retirement you need to plan to survive to 100.
The bet is open ended and risk free for you & your spouse. So look at it from that perspective if you were on the other side of the trade.
A further thought to ponder, in order to have a 90% chance of your pension funds lasting throughout your life in retirement you need to plan to survive to 100.
Pretty sure annuities have plummeted in values over recent years. Don't think you are missing much.
There are of course many variables (age, partner, annual growth etc)
They are perhaps more appealing when you are 70-75+, but unless we have hit the Great Depression to match the 1920s (always possible, eh!), most younger folk would manage their funds, take 3.5% or so out (various ways you could maybe take 4 or more....read up on Guyton-Klinger!) & have an inheritance to pass on if/when the inevitable happens....
Unless you are so risk-averse you need that guarantee, of course. We aren't all the same!
There are of course many variables (age, partner, annual growth etc)
They are perhaps more appealing when you are 70-75+, but unless we have hit the Great Depression to match the 1920s (always possible, eh!), most younger folk would manage their funds, take 3.5% or so out (various ways you could maybe take 4 or more....read up on Guyton-Klinger!) & have an inheritance to pass on if/when the inevitable happens....
Unless you are so risk-averse you need that guarantee, of course. We aren't all the same!
k the annuity Consider also that when you die, and your wife dies, all the annuity money goes to the provider.
If you choose to keep it in your draw down pension pot, upon death the remainder becomes part of your estate I think, so if you have kids etc, they will get the remainder as part of the inheritence.
You need to fact check that with a PFA though, but might be something else to think about.
If you choose to keep it in your draw down pension pot, upon death the remainder becomes part of your estate I think, so if you have kids etc, they will get the remainder as part of the inheritence.
You need to fact check that with a PFA though, but might be something else to think about.
What happens if you become unable to manage your "pot" as you get older (dementia, illness etc.)? Someone else would need to take responsibility for managing this but with an annuity you will just continue to be paid by the annuity provider.
Annuities aren't as appealing as they once were, although to a lot of people they have never been appealing, but there are still benefits to them for some.
Annuities aren't as appealing as they once were, although to a lot of people they have never been appealing, but there are still benefits to them for some.
One way of describing the usefulness of an annuity (think it was another thread here...) is insurance against living longer than you expected 
You may well be able to do better in terms of pounds and pence with drawdown - but with a bit of a crash, and some adverse economical fall-out, an escalating annuity might look a bit safer.
Does limit your ability to leave cash to offspring of course.
You may well be able to do better in terms of pounds and pence with drawdown - but with a bit of a crash, and some adverse economical fall-out, an escalating annuity might look a bit safer.
Does limit your ability to leave cash to offspring of course.
snabzter said:
What happens if you become unable to manage your "pot" as you get older (dementia, illness etc.)? Someone else would need to take responsibility for managing this but with an annuity you will just continue to be paid by the annuity provider.
Annuities aren't as appealing as they once were, although to a lot of people they have never been appealing, but there are still benefits to them for some.
You only need to manage your drawdown pension if its invested in a SIPP... there are plenty of companies that will manage your drawdown for you (one of them sponsors this forum...) such that its no more onerous than an annuity.Annuities aren't as appealing as they once were, although to a lot of people they have never been appealing, but there are still benefits to them for some.
leef44 said:
Some bullish comments on this thread considering it's taken longer than 10 years to pay for the last global financial crisis and this global pandemic looks to be more severe than that
leef44 said:
If you were 15 years into drawdown of your own pension and the market took a big crash, there is a risk that your planned forecast of 10 more years might end up 8 years of funds left.
In the OP's example above the annuity company is offering 3.8%/pa on his £470k pot.The 4% rule (bearing in mind the author of this now says 5% is still safe/worst-case scenario) would give £1000 more than the annuity company AND he would still have his original pot, so there is never going to be the risk of "8 years of funds left".
Jasey_ said:
I cannot think of any set of circumstances where an annuity makes any sense to anyone.
Let's assume you pass away:1- is your partner happy / capable of managing your investment portfolio and all the respective financial decisions on FAD and UFPLS withdraws, regulation changes, taxation implications etc. ?
2- Your partner has a health/mental issue that affects their decision making, would you be happy for them (or legal guardian) manage the financial affairs?
3- You pass away 10 years into your retirement. Before your passing, you both were living comfortably on 2 state pensions and a small DC pot to provide for special treats, but the DC pot is now empty. Do you think your partner be happy living on a single state pension?
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