Alternatives to Annuities

bristol_pilot

I would rather have 4% variable and access to capital than 6.3% fixed and lose the capital. Annuity rates are usually fixed at purchase, whereas deposit interest rates are currently at historically low levels at present due to historically low base rates which can only go in one direction going forward. Only the timing is in doubt. Fixing on an annuity at 6.3% would be a disaster if we return to interest rates of 10% in the future. Plus, at 65, one may not have that much lifespan left and the option to spend the capital while I can still enjoy it is a definite plus.

taking_stock

does anyone know if the 25% tax-free PCLS may still be taken if one chooses the flexible drawdown option?
say for example, i met the £20k pa MIR through an annuity, could i then take 25% tax free from my SIPP and 'withdraw' the remainder of the SIPP at my marginal income tax rate?
thanks in advance.

Gatser

Annuity rates for a 60 yr old at c.6%.
Assuming State pension of £5k

One strategy for folks with only PP monies, could be to take an annuity at age 60, utilising £250k of their PP funds = £15k pa
Then at 65 they get State pension = £20k total

So, any other PP money could be drawn down at higher/more flexible rates.

Or am I missing something?

Loughton_Monkey

bristol_pilot wrote: »

Fair enough, annuity income is also taxable. I have come to regard compulsory annuities as a form of legalised theft. You get an income little greater than could be obtained in the building society and in return give away the capital. To be able to include return of capital as part of my retirement income allows a lot of flexibility and is a great benefit.

I don't see it that way.

If you mean potentially poor value, then you have an argument. But otherwise it is simply a form of Life Assurance in reverse.

Life Assurance is not 'theft'. OK, they make a profit, but if you die the week after taking it out, it has been exceptional value. Annuities are the same. If you live a long time, it keeps paying - long after your drawdown would have run out of money. The extra gained by long livers is paid for by early dyers.

I know you would claim that your drawdown funds might get 5% to 7% on average (compared with 3%/4% equivalent inherent in an annuity), but don't forget that a dwindling pension fund would struggle after a 'crash' fall when you draw from it in those circumstances. [It's really the reverse of '£ cost averaging' benefits when building up a fund through regular deposits].

middlepuss

Prudential have quoted an annuity rate of 3.68% for a 60 year old woman. The annuity would increase in line with RPI. Other providers' rates seem even lower.

Would I be better off transferring to a SIPP, taking 25% out and investing it and leaving the other 75% in the SIPP invested in high income equity unit trusts and just taking the dividends as income drawdown? Even if the stock market falls a lot, the income from unit trusts usually falls very little if at all. And income from units should keep pace with RPI in the medium term.

I will have a final salary CPI-linked pension so this annuity/SIPP would not be my main pension.

Linton

Gatser wrote: »

Annuity rates for a 60 yr old at c.6%.
Assuming State pension of £5k

One strategy for folks with only PP monies, could be to take an annuity at age 60, utilising £250k of their PP funds = £15k pa
Then at 65 they get State pension = £20k total

So, any other PP money could be drawn down at higher/more flexible rates.

Or am I missing something?

Inflation. 6% would be for a level annuity.

taking_stock

No, in this case inflation isn't needed on the £20k.

The new government document is quite clear that the £20k pa does NOT have to be index-linked - they are allowing it to be from a level annuity, which is why they have set the bar so high at £20k, in recognition of the fact that most money purchase scheme-holders choose a level annuity rather than an escalating one.

jamesd

middlepuss, that plan seems fine. Depending on investments you might expect to take 4-6% without seeing any long term capital value reduction, possibly an increase. The lump sum could be placed in a S&S ISA as fast as possible and used to generate tax free income.

dunstonh

bristol_pilot wrote: »

I would rather have 4% variable and access to capital than 6.3% fixed and lose the capital. Annuity rates are usually fixed at purchase, whereas deposit interest rates are currently at historically low levels at present due to historically low base rates which can only go in one direction going forward. Only the timing is in doubt. Fixing on an annuity at 6.3% would be a disaster if we return to interest rates of 10% in the future. Plus, at 65, one may not have that much lifespan left and the option to spend the capital while I can still enjoy it is a definite plus.

4% variable will typically be expected to be less than 6.3% fixed. Even if rates return to something normal. they will typically float at levels which would average less than 6.3%. 10% average interest rates would be highly unlikely.

Or you could go with 4% annuity rate with indexation and buy value protect on the annuity so you get your money back on death.

bristol_pilot

I would intend to spend the capital - like a mortgage in reverse. Use it to fund travel in the first, hopefully active, phase of retirement. When I'm content to sit in front of the TV my £20k+ from old final salary schemes will do. Not many of my relatives going back several generations have lived much beyond 65 and none beyond 75. Life Assurance is not compulsory so therefore not 'theft'.