MSE News: Guest comment: Should you buy an annuity?

Former_MSE_Guy

This is the discussion thread for the following MSE News Story:

"Tom McPhail discusses whether retirees should use their pension to buy a retirement income following Govt rule changes ..."

Read the full story:
Guest comment: Should you buy an annuity?

property.advert

My guess is that the percentage of those who take an annuity will be inversely proportional to those who take an active interest in their pension fund during their working life. That said, a return to higher interest rates will make annuities more attractive.

dunstonh

property.advert wrote: »

My guess is that the percentage of those who take an annuity will be inversely proportional to those who take an active interest in their pension fund during their working life. That said, a return to higher interest rates will make annuities more attractive.

Not necessarily as you can hold cash savings in a pension.

in the days where mortality gain was much greater, annuity was clearly a good option. Increasingly mortality gain is not as much or at least starts to benefit much older than it used to be. So, the decision may actually be one where you should use unsecured income in the early years of retirement but move to secured income in your 70s. Of course, risk will be the main driver for most. If you cannot afford the volatility of investments then annuity is the clear choice.

jamesd

Tom, it'd be really nice if you don't give the impression that you don't know what you are writing about by suggesting that it's only now that investors are no longer forced to buy an annuity. ASPs had been around for a while and worked entirely acceptably for retirement income, though not for inheritance tax mitigation. I know you know this, so why not write truth instead of party politics?

The most important recent changes were the reduction in the amount of money that could be taken from income drawdown and the increase in tax if a pension pot is inherited and not moved to a pension. The former makes ISAs an even more important part of retirement planning for anyone who's looking to retire before state pension age.

Pension annuities are poor value for money, delivering less income even than gilts, against which they are usually benchmarked to work out whether they are delivering a good deal. When you look at the rest of the investing world, including corporate bonds and equity income funds, they are clearly a particularly poor deal at younger ages, only improving for those who are over 75 when the death rate produces a significant cross-subsidy from those who die early to those who live longer.

What annuities are good for is those who don't know about investing - and who haven't used products like Vantage to learn - and for the core non-negotiable part of essential income. For anything else a drawdown approach at younger ages can be expected to produce greater returns for the money. People can adjust their discretionary spending to reflect their variable income and don't need to have the strong and expensive guarantee that an insurance company needs to have to ensure that it will be able to pay out exactly what it says it'll pay.

Annuities are still gong to be the majority choice, simply because most people don't take the time to learn how to manage investments. Given the importance of investing to producing the income for a happy retirement, that's a sad failure of financial education.

sugal

My husband and I have been researching purchasing annuities for the last 6 months. We're both retired now and are fortunate to have savings and investments to live off for now. However, we need to do something with our pension funds so decided a GAP max drawdown is the best route for us both. The problem is that we don't want to use a financial advisor but are having a problem with finding a provider who will deal with us direct.

We know what we need - it's our money to do what we want with - we do not want to pay any portion of our funds to a financial advisor. Does anyone know of any drawdown annuity advisors who will deal direct with a client please?

dunstonh

We know what we need - it's our money to do what we want with - we do not want to pay any portion of our funds to a financial advisor. Does anyone know of any drawdown annuity advisors who will deal direct with a client please?

Do you want to do drawdown or annuity?

A number of annuity providers will deal direct with you but most will not. All that do, just keep the amount they would have paid an IFA for themselves. Plus, the terms they offer you are often less than those that an IFA would get. So, it seems pointless not to use an adviser to do this when it is the best way to get the most for you.

gadgetmind

sugal wrote: »

We know what we need - it's our money to do what we want with - we do not want to pay any portion of our funds to a financial advisor. Does anyone know of any drawdown annuity advisors who will deal direct with a client please?

A Hargreaves Lansdown SIPP will let you do exactly that, but you won't find it as cost effective as you might think as the charges are quite high and you don't (currently) get any refund of the trail commission on funds and they charge £200 pa for other holdings such as equities, ITs, etc.

I'm sure some others must also be in this business. I can see why they have additional charges regards GAD, and organising payments from the cash account as it's just like running payroll (but without NI), but the side of things whereby you use divis or disposals to make sure the cash is there is just like any other online SIPP/ISA/etc.