The big R cometh

zygurat789

The big R cometh and it is time to make a decision. I would imagine that an annuity is the most popular method of providing a pension but now the problems begin. I think there are:-
Flat rate or indexed
Single or joint life
Assured value or not
Guaranteed or not
Are there any other options?
Within each of these there are many choices and a decision has to be made on each one.
I have often seen this decision described as the most important pension decision and yet I have not been able to find any discussion an this board.
I, and a lot of other people who will be considering buying an annuity would be interested to hear the thoughts of others who take an interest in this subject.
If what I am lead to believe about the importance of this decision is correct perhaps we could elevate it to a sticky

dunstonh

Are there any other options?

Yes there are.

I have often seen this decision described as the most important pension decision and yet I have not been able to find any discussion an this board.

Lots of discussion has occured.

I, and a lot of other people who will be considering buying an annuity would be interested to hear the thoughts of others who take an interest in this subject.
If what I am lead to believe about the importance of this decision is correct perhaps we could elevate it to a sticky

Get a local IFA to see you. That is the only way to get full whole of market access to providers. Many of the best annuity providers dont deal direct to provider. In most cases it wont cost you anything different either as DIY providers just keep the money they would have paid the IFA.

zygurat789

dunstonh wrote: »

Yes there are.

Where would I look please?

Lots of discussion has occured.

Where would I look please?

Get a local IFA to see you. That is the only way to get full whole of market access to providers. Many of the best annuity providers dont deal direct to provider. In most cases it wont cost you anything different either as DIY providers just keep the money they would have paid the IFA.

I am trying to do a bit of research before I see one, I don't like to go into anything blind

zygurat789

I would always shy away from an indexed linked annuity because, from the quotes I have seen,it takes about 15 years for the indexed version to catch up to the flat rate and another 7 to break even. By the time one has reached 80 the spending desire has disappeared, along with many other things, How many 80 year olds did you see in the night club/pub/pictures/restaurant/or wherever you were last weekend. So long as there is enough to keep house and self together and pay for the grandchildrens sweets most 80 year olds are happy.
So I would choose a flat rate annuity.

CLAPTON

zygurat789 wrote: »

I would always shy away from an indexed linked annuity because, from the quotes I have seen,it takes about 15 years for the indexed version to catch up to the flat rate and another 7 to break even. By the time one has reached 80 the spending desire has disappeared, along with many other things, How many 80 year olds did you see in the night club/pub/pictures/restaurant/or wherever you were last weekend. So long as there is enough to keep house and self together and pay for the grandchildrens sweets most 80 year olds are happy.
So I would choose a flat rate annuity.

depends upon what assumptions you make about inflation.... would you have taken the same view in the 70's?

EdInvestor

Try using the search option for this forum to find threads on annuities.

zygurat789

CLAPTON wrote: »

depends upon what assumptions you make about inflation.... would you have taken the same view in the 70's?

What sort of % return who you have got for an RPI linked annuity in the 70s? Now in the late 60s maybe, hindsight is always 20/20.
I have only seen quotes for increases of 3%pa and 5%pa not RPI linked.
There is not much point in having a big fat pension if all you want to do is read the paper, have a cup of tea and snooze

jamesd

The main alternative to annuity purchase is income drawdown: leaving the money invested and taking an income from the investments. The pension pot in this case is fully inheritable by the spouse so they automatically get a 100% pension. You can take the 25% tax free cash and leave the rest in drawdown if desired.

The main disadvantages are the up and down movements of investments and the need to be comfortable with them.

The degree of up and down movement - the volatility, often called risk - is controllable through the choice of investments. That in turn affects the income, with lower risk expected to produce a lower income.

You might reasonably expect to be able to take 5-6% of the pension pot size as income and to have that increase with inflation but this depends greatly on the choice of investments and how the markets do.

Using income drawdown and buying an annuity each year with some of the money can exploit the way that annuity payouts rise with age and gradually reduce the risk level as you get older.

We're currently in a poor time for annuity buying, in part because quantitative easing has reduced the returns on UK government bonds. We're currently in quite a good time for holding shares because prices remain quite low compared to those of a few years ago, leaving much potential for growth over the next five years or so. This implies that now may on balance be a better time to defer annuity purchase or to do so for only part of the pension pot. But this also involves predicting the future and that's an inherently unreliable passtime.

zygurat789

jamesd wrote: »

The main alternative to annuity purchase is income drawdown: leaving the money invested and taking an income from the investments. The pension pot in this case is fully inheritable by the spouse so they automatically get a 100% pension. You can take the 25% tax free cash and leave the rest in drawdown if desired.
I was trying to find alternative types of annuity
The main disadvantages are the up and down movements of investments and the need to be comfortable with them.

The degree of up and down movement - the volatility, often called risk - is controllable through the choice of investments. That in turn affects the income, with lower risk expected to produce a lower income.

Risk is not what you want at this time of life and with age comes the ability to make very wrong decisions.

You might reasonably expect to be able to take 5-6% of the pension pot size as income and to have that increase with inflation but this depends greatly on the choice of investments and how the markets do.

I thought a drawdown facility tended to produce the same sort of income as an indexed linked annuity

Using income drawdown and buying an annuity each year with some of the money can exploit the way that annuity payouts rise with age and gradually reduce the risk level as you get older.
Lots of small annuities - far too much hassle for a person of this age

We're currently in a poor time for annuity buying, in part because quantitative easing has reduced the returns on UK government bonds. We're currently in quite a good time for holding shares because prices remain quite low compared to those of a few years ago, leaving much potential for growth over the next five years or so. This implies that now may on balance be a better time to defer annuity purchase or to do so for only part of the pension pot. But this also involves predicting the future and that's an inherently unreliable passtime.

It's an interesting point
I like this. Stick it a drawndown until shares rise and then when interest rates have risen, buy an annuity.
Once again it's timing and then there's the second part of the double dip to come.

TMFTP

Index-linked doesn't necessarily mean "will go up" - if you have a period of deflation it may (and in the past year DID) mean your pension goes DOWN. Unless you buy a "no-negative" guarantee, which pushes the starting income down further. If you want escalation at the moment, it's cheaper to select a fixed 3% or 5% p.a.

Two phases to selecting when to annuitise. You take your money OUT of a pension (investments) and buy an annuity at a particular rate. At the height of the credit crunch we had equities (shares) crashing, meaning peoples fund values were going down. On the other hand, we had high annuity rates, giving more income.

Now, we have people's pension funds recovering, and annuity rates going down. Unless you're VERY active in managing your Drawdown fund and the risks, picking an annuity point will always be a lottery.

jamesd

Whether drawdown produces more or less than an index-linked annuity depends on age. At younger ages like yours it has an advantage over an annuity. At older ages reducing remaining life expectancy gradually causes the annuity to have an advantage for income production. Somewhere around 75 is where the changeover may start to happen.

It is possible to have the income from drawdown be safer than annuities, by buying UK government bonds and holding them until they mature. Or by using cash for that matter. It's a dial-a-risk level proposition since you can pick any level of risk you want, from as safe as the Treasury to completely reckless.

Getting the timing right is the challenge. It looks good now to exploit an expected gain in the markets and buy annuities more when the interest rates have risen but nobody can guarantee that the future will play out that way. Unless you're in a great hurry, though, giving it six months to a year for the effects of QE to fade a bit seems like a good idea.

You might also want to look at third way annuities.