Investment-backed annuities

downshifter50

Hi everyone

I'm hovering on the brink of taking out an annuity of some kind (state pension isn't enough!).

I've talked to an HL advisor who discussed conventional lifetime annuities but didn't seem keen to explore any other options.

I've recently read about investment-backed annuities which seem like a good solution for at least part of my pension pot (currently just over £300K). I'm a fairly novice investor but could cope with the idea of relying on a Balanced or Cautious Fund to back my annuity.

Has anyone any views on these? Any recommended providers?

Apologies if this topic has already been discussed elsewhere - I did look for threads but could find none.

Aegis

downshifter50 wrote: »

Hi everyone

I'm hovering on the brink of taking out an annuity of some kind (state pension isn't enough!).

I've talked to an HL advisor who discussed conventional lifetime annuities but didn't seem keen to explore any other options.

I've recently read about investment-backed annuities which seem like a good solution for at least part of my pension pot (currently just over £300K). I'm a fairly novice investor but could cope with the idea of relying on a Balanced or Cautious Fund to back my annuity.

Has anyone any views on these? Any recommended providers?

Apologies if this topic has already been discussed elsewhere - I did look for threads but could find none.

What brought the idea of an investment-backed annuity to your attention rather than capped drawdown or flexible drawdown? Either of these allow you to access income directly from your pension portfolio without restricting your investments to those permitted by the insurance company.

It certainly worth considering all of your options and checking the restrictions and charges associated with all of your possible strategies.

downshifter50

Fair question aegis.

It's just that capped and flexible drawdown seem to need a level of investment knowledge and confidence I don't have.

I realize I'll be going through an IFA whatever happens, but I'd prefer not to feel too out of my depth, or take too much risk.

dunstonh

It's just that capped and flexible drawdown seem to need a level of investment knowledge and confidence I don't have.

Which is what your employ the adviser for. What makes you think you need less knowledge for an investment backed annuity?

atush

An IFA will help you decide where and how to invest. An annutiy provider is only happy selling you an annnuity. An annutiy bought even through another party such as an FA or IFA will pay a commision.

why restrict yourself? why restrict what your spouse or dependants would inherit if you die earlier thanexpected?

downshifter50

Thanks for comments everyone.

I was just curious about these products as they seem to be fairly new and are being marketed as a kind of 'middle way' between level annuities and income drawdown.

I couldn't find much comment about them and just wondered if anybody out there had any direct experience of how well they perform (or not).

dunstonh

I was just curious about these products as they seem to be fairly new and are being marketed as a kind of 'middle way' between level annuities and income drawdown.

They have been around for decades. However, a couple of providers have decided to actively market them again more aggressively than they used to.

wondered if anybody out there had any direct experience of how well they perform (or not).

Performance is based on investment returns which will always be an unknown. If you are willing to take the risk of an investment backed income then drawdown should also be considered.

downshifter50

That puts them in context, very helpfully - thanks dunstonh.

kidmugsy

downshifter50 wrote: »

Hi everyone

I'm hovering on the brink of taking out an annuity of some kind.

Why annuity singular? With £300k you could surely take out several different kinds if you wanted to.

jamesd

Your age is a critical factor. If you're relatively young, say 55-65, annuities probably aren't going to offer a very good deal. Takes until you're 75 before they start to offer a deal that may beat investment returns. Assuming you have no health conditions that would reduce your life expectancy and increase annuity income.

There are really well established methods for providing retirement income and any IFA should have no difficulty at all in offering you a suitable mixture of investments backed by cash to smooth out possible income variations. It's completely routine work for an IFA and people here would be happy to review what is suggested for reasonableness.

With a £300,000 pot you'd take £75,000 as a tax free lump sum and look to move that into ISA investments in a S&S ISA that pay interest tax free as rapidly as the annual allowance permits. The remaining £225,000 remains in the pension pot to be used for something that provides income: drawdown, annuity or some mixture.

Assuming 5% of capital available as income you'd get perhaps £3,750 untaxed from the ISA pot and £11,250 taxable from pension income, subject to the GAD limit cap if under drawdown, which will probably reduce the pension part for a while, depending on how old you are. If you have no other income you'd have £14,371 after tax income available. You could draw on the ISA pot at a higher rate to keep the income up until you're able to take more out of the pension pot.

You probably have the state pensions either now or starting sometime and knowing that you have that income to come would let you increase the income taken from the ISA pot to provide a smooth income level before and after the state pensions start.

There's no great reason to worry about investment income fluctuations because you'd keep at least a year and better several years worth of income outside the pension in savings accounts so that you can largely forget about short term variations. The investments would top up the savings accounts, your regular income would come from them, not the investments directly.

If you're old enough for it to make sense (not close to 55) you could consider some use of say a level annuity to provide some core secure income to cover your most critical bills. Perhaps better to buy regularly rather than all at once to gradually get more certainty.

The annuity products are marketed to some extent to exploit people like you who may not yet be comfortable with investments. Better to become comfortable rather than paying the price. This doesn't mean that they have no uses, sometimes they can be appropriate.

downshifter50

I've not been checking this site for a few days so many belated thanks for your reply jamesd and apologies for not acknowledging it sooner.

I'm only 61 so your suggestions make a lot of sense.

One niggling query: given annual ISA limits it'd take me a few years (5?) before I could move the whole £75K across into ISAs and benefit from the full £3,750 untaxed from the ISA pot. Could I rely on the taxed income from the balance each year to produce 5% return?