Level or increasing annuity - opinions?

kangoora · 12 March 2018 at 12:33PM

I'm currently retired (56) and wife is 49 and she is still working to max out her SP NI contributions, plus she enjoys her work.

I'm drawing a small pension of £5.6k which is in the PPF. The pension administrators have recovered enough cash to come out of the PPF and purchase annuities in excess of PPF benefits which will happen later this year, I need to decide by early June.

I have 2 options (both options have a 50% spouse benefit);

increase of pension to £6,150 of which only £2,750 will increase at up to 5% RPI (default). The remaining £3.4k will never increase.
take a level annuity of £8,650 which will never increase - (opt in only)

The crossover/breakeven points illustrated are;
at 1% inflation - 119 years old / over 120 years old
at 3% inflation - 77 years old / 94 years old
at 5% inflation - 69 years old / 79 years old

I have 2 further DB pensions of approx £6k (in total) due at 60, not taking early. One I can't, one i won't due to high reductions.

We both qualify for full SP (checked) although OH needs to work for a few more years. I qualify for a further £1.5k from USA SS assuming taken at 67 also.

Currently have about £75k cash/cash ISAs we're planning on depleting up to age 60 (see later for why). We have/should have circa £500k in both DC pensions when I hit 60 and with a projected spend of £30k p.a. i'm forecasting a large surplus on that budget when SPs start to kick in. Maybe we should look at spending more money per annum

I'm leaning towards the level annuity option as;

the extra £2.5k year from the level annuity would come in very useful now; as for the next four years our £30k budget is probably around £45k due to extra costs which will disappear in 4 years time.
with the forecast surplus in later years I am less concerned about income post 75 years of age
We will have (best case for both with SPs and DBs) £24.5k + annuity + DC pension pot
OH will have (worst case for single) £12k + (annuity x 50%) + DC pension pot

On the other hand :rotfl: if we get high inflation then the RPI linked annuity looks attractive. Plus, with my wife being 7 years younger presumably a portion would be paid for longer (no reduction apart from the 50% spousal reduction).

Looking for opinions on taking the extra now or taking the RPI linked option (45% RPI linked).

AnotherJoe · 12 March 2018 at 1:00PM

Its a personal thing but i would take the view that the extra money now would be more useful while you need it plus you have extra money coming in later which will mitigate any inflation losses.

Someone will no doubt say "oh but what if you need a care home when you are 85" but (a) why always save for future potential events, at some point you have to take care of life now, and (b) at the levels you are looking the amounts wont make any difference to care home fees anyway.

So id go for the level annuity of £8,650

Tealblue · 12 March 2018 at 1:58PM

'What if you need a care home' - look at the cost of paying a one-off premium to cover the costs if you do. At your relatively young ages it could be less than you fear.

drphila · 12 March 2018 at 9:25PM

Tealblue wrote: »

'What if you need a care home' - look at the cost of paying a one-off premium to cover the costs if you do. At your relatively young ages it could be less than you fear.

Can a care annuity be bought that far in advance?

Linton · 12 March 2018 at 10:08PM

Your reasons for going for a flat rate annuity seem sensible to me. If you want to improve your long term inflation linked cover it could be better to defer your state pensions for a few years rather than getting a capped inflation linked annuity. It will improve your situation if inflation really gets out of control.

In your position where you would appear to have more than enough money to meet your needs I believe that security, cash flow and tax considerations are more important factors than lifetime return.

Do you have unused tax allowance now you are not working? If so drawdown as much of the DC pension as you can at zero tax. Any drawdown you dont need can be put into an S&S ISA. You dont say how the DC pots are split between you and your wife- is there any risk that you wont be able to access all your DC pot without paying higher rate tax?

kangoora · 12 March 2018 at 11:09PM

Thanks for comments, it seems like in my particular circumstances the level annuity is probably the right route.

@Linton - yes, I'm drawing down up to my personal tax allowance. I have the much larger DC pension but not in any danger of being in higher rate of tax, max for me at 4% drawdown would be about £12k below HRT (including annuity, DB & SP).

Also, this is why we are shoving as much cash as we can into OHs DC pension - one of the main reasons for the overspend in the next 4 years when she will look to retire.

A Care Annuity does sound interesting, I may look into that. My dad and nana both had dementia/alzheimers relatively early (late 60s) which is worrying although Mum still going strong with all her marbles at 86. One extra reason for leaving the rat-race as early as I could and still be able to have a comfortable retirement.

AnotherJoe · 13 March 2018 at 10:40AM

kangoora wrote: »

A Care Annuity does sound interesting, I may look into that. My dad and nana both had dementia/alzheimers relatively early (late 60s) which is worrying although Mum still going strong with all her marbles at 86. One extra reason for leaving the rat-race as early as I could and still be able to have a comfortable retirement.

Let us know the cost if you do. I still suspect even at ages 56/49 it will make your eyes bleed.

jeffkey1 · 27 March 2018 at 10:52PM

I'm currently nearly 59 but in full time employment paying into my Company Pension.

Was the Nortel a Defined Contribution scheme or not?

My worry is that if I take either of these two options -

1) Increasing pension of ~£11,000 with a % increasing by RPI.
2) Or a Level annuity of ~£12,000 which will never increase.

My current pension contributions tax free level be capped at £4000.

kidmugsy · 27 March 2018 at 11:45PM

Linton wrote: »

If you want to improve your long term inflation linked cover it could be better to defer your state pensions for a few years rather than getting a capped inflation linked annuity. wont be able to access all your DC pot without paying higher rate tax?

He could also defer his US Social Security to 70 for the same reason.

kidmugsy · 27 March 2018 at 11:49PM

kangoora wrote: »

I'm currently retired (56) ... We have/should have circa £500k in both DC pensions when I hit 60 ...
I'm leaning towards the level annuity option as ... the extra £2.5k year from the level annuity would come in very useful now; as for the next four years our £30k budget is probably around £45k due to extra costs which will disappear in 4 years time.

I'm baffled. You are 56: why not just withdraw some DC money to plug your budget gap?

Level or increasing annuity - opinions?

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