Fixed term annuity
chiefie
Posts: 406 Forumite
Hi all
Wondered if anyone had any thoughts.
Thinking about how to manage two db pensions so I can retire early at 55. Both have similar values at 65 and one of these together with sp is sufficient for me post 65. I may have to make a few years voluntary payments for ni or do some part time work to get the credits and supplement income (more as d miss the social side of work to start with I expect)
So thinking of transferring one db to my existing sipp, taking TfLs and using the rest to cover 55-65. As I am generally risk averse for this short period, and don't want to risk a large loss in that ten year period I wondered if a ten year fixed term annuity would be suitable rather than investment and drawdown.
Any thoughts/feedback ?
Many thanks in advance
Wondered if anyone had any thoughts.
Thinking about how to manage two db pensions so I can retire early at 55. Both have similar values at 65 and one of these together with sp is sufficient for me post 65. I may have to make a few years voluntary payments for ni or do some part time work to get the credits and supplement income (more as d miss the social side of work to start with I expect)
So thinking of transferring one db to my existing sipp, taking TfLs and using the rest to cover 55-65. As I am generally risk averse for this short period, and don't want to risk a large loss in that ten year period I wondered if a ten year fixed term annuity would be suitable rather than investment and drawdown.
Any thoughts/feedback ?
Many thanks in advance
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Comments
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An annuity would pay you back about as much as the purchase price. Not the greatest of buys. No harm in checking but current and savings accounts might pay you more.
Have you considered P2P? Using places like Ablrate and MoneyThing it's unlikely that you'd do as badly as breaking even. I expect about ten percent interest a year after up to 2% bad debt allowance from their secured lending.0 -
I don't know how companies have the audacity to sell these things.0
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I don't know how companies have the audacity to sell these things.
They can still work in the right circumstances. They are effectively the niche option now though.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
An annuity would pay you back about as much as the purchase price. Not the greatest of buys. No harm in checking but current and savings accounts might pay you more.
Have you considered P2P? Using places like Ablrate and MoneyThing it's unlikely that you'd do as badly as breaking even. I expect about ten percent interest a year after up to 2% bad debt allowance from their secured lending.
I suppose my Worry with that is that I can not drawdown too mUch a year and I'm fearful of a market 'correction' that I can't recover from in time. I would take about 30k per year out over 10 years and I prefer certainty to the chance of growth0 -
I can't imagine what circumstances but you'll have more knowledge then me.
Enhanced rates due to poor health can give a secure income for life, well above any so-called "safe drawdown rate". And do not forget that the pension freedom options also changed the legislation for annuities to allow greater choice on death benefits. So, you could have a return of the unused fund on death with an 7% enhanced rate. Or a 30-year income guarantee.
You should not forget that every generation or two there is usually an event that sees a significant loss event occur. Those with low drawdown rates and those that can afford to turn off the income for a while as they have other sources can usually ride those events out. Those who are taking a high drawdown rate could find their pot shunted into a spiral of erosion that causes it to run out before death.
You should not underestimate the ability of people to completely mismanage their money.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
As a very risk averse person, I can see the place of annuities in my retirement planning. Devoting some of my pot to provide either a term income or even a lifetime income with no risk is attractive. Sometimes chasing returns is not the goal. If you have "enough" and are in the decumulation phase, avoiding risk, especially pound cost ravaging, may be the goal.
It's not so much that I would completely mismanage my money in retirement but more that I would like to avoid some of the pressure of having to manage all of my pot. Having said that, right now they don't look that attractive but I am watching rates to see what happens.
Edit: I'll add that my attitude might be different if I had some DB pension to provide a base level of income prior to getting the state pension. But I don;t have any DB pensions, just a large DC pot and thus using some of that to provide a risk free base level of income is attractive. Although right now I am thinking more of a form of bond ladder rather than an annuity.0 -
That willingness to lose money by handing it over to an insurance company to be rid of the decision making is an area where term annuities can make sense for their buyer, poor though the deal is in pure financial terms. If there's money to burn, doing a bit of burning to simplify life just might not matter.I suppose my Worry with that is that I can not drawdown too mUch a year and I'm fearful of a market 'correction' that I can't recover from in time. I would take about 30k per year out over 10 years and I prefer certainty to the chance of growth
Other options that don't involve a material risk to capital that you could consider include:
1. Transferring to a SIPP that lets you pick which interest paying deposit accounts to use. Not likely to be great rates at the moment but still likely to beat the term annuity.
2. Money market funds. At the moment you'd lose around 0.2% a year plus inflation on these but they might still beat te annuity. Longer term, with your ten year horizon, rates might rise to put you in profit, not just beating the annuity.
With some risk, mostly from inflation:
3. Gilts.
4 Pound-denominated bonds from other governments that you consider reliable.
Even with limits on what you take out you might be able to get out ten to twenty thousand extra a year and put that into some of the better current and savings account deals. Not going to be great but a decent chance overall that you'll beat the term annuity.0 -
Perhaps worth noting that over in Drawdown: safe withdrawal rates I mention:OldMusicGuy wrote: »As a very risk averse person, I can see the place of annuities in my retirement planning. Devoting some of my pot to provide either a term income or even a lifetime income with no risk is attractive. Sometimes chasing returns is not the goal. If you have "enough" and are in the decumulation phase, avoiding risk, especially pound cost ravaging, may be the goal.
"Defer your state pension if you have normal life expectancy and no special case for not doing it. Up to five years has a good chance of breaking even, up to ten years can be good for longevity insurance (more here) and to increase the safe withdrawal amount from drawdown, by providing more of your minimum income requirement, see for example Blanchett's paper The Impact of Guaranteed Income and Dynamic Withdrawals on Safe Initial Withdrawal Rates."
Blanchett's paper looks at the proportion of guaranteed income vs non-discretionary spending and finds that higher levels of guaranteed income increase the safe withdrawal rate. For US financial planners he says that the success rate normally used is too high and provides Table 5 that says what target success rates should be used for various combinations:
Looking at the left side of that, the 50% / 50% box with 76% in it means that a person with mandatory spending at 50% of income with guaranteed income comparable to 50% of their wealth* should have a 76% success rate used if historical returns are being used and they aren't willing to accept much income variation. If they were willing to accept more variation they could cut that to 47%. So he observes:
"An important takeaway from Table 5 is that targeting a very high probability of success (e.g., 95 percent) will not likely be optimal for most households. Although targeting a high probability of success creates a perception of safety, it appears that for most retirees it may lead to initial safe withdrawal rates that are too safe, especially for those households with high levels of existing guaranteed income. Therefore, although it may be difficult to explain why targeting 75 percent (or even 50 percent) is actually quite safe (versus 95 percent), not doing so will likely result in below-optimal consumption during retirement."
* he explains that just below table 3, it's effectively amount of guaranteed income times the cost of buying that income. So if you have £8k of state pension and triple lock annuities could be bought for 3% of the amount spent that £8k would be worth 8000 / 0.03 = £267,000.0 -
Thanks James. I have that thread as a favourite and you have reminded me to go and work through it in some depth as I do my retirement planning.0
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