Conventional Vs Fixed Term Annuity

I'm currently dealing with an IFA who is charging 1% of my pension fund (after Tax Free Lump Sums),

He is recommending a fixed term Annuity of 5 or 10 years rather than a conventional lifetime annuity. I can see the advantages of this, circumstances may well change. I am currently 60 y.o. in good health and the fund value is approx £120,000.

My question(s): Generally, is a Fixed term a better bet and would I be expected to pay the 1% fee again at the end of the fixed term?

Thanks in advance...

Comments

  • A "better bet " is subjective.

    The general risks/benefits to a temporary annuity are

    Risk:
    Annuity rates may get worse in the future

    Benefits:
    Annuity rates may get better,
    You may get a better rate in the future because you are in poorer health
    In the meantime and depending on the terms your spouse/family may or may not get some money on death

    There are other things to consider including but not excluding other factors:

    The part of the fund that does not buy an annuity may be invested on a guaranteed basis (where the future sum is known) or invested (where the sum could be better or worse).

    There is even another factor, because the part of the investment that does not buy an annuity may be invested under drawdown rules (where the sum can be used in the future to purchase drawdown or an annuity) or annuity rules, where the only option is an annuity.

    What other annuity/drawdown/phased options have been considered and how do they compare for you? Make sure your adviser has considered all the options for you and that you understand why they are unsuitable or suitable for you.

    On the 1%, (0.1% each year) it may be the case that you pay another 1% for an annuity at the end, but that shouldn't be a major factor in your decision as to whether the advice is right for you or not.
  • CannySaver_2
    CannySaver_2 Posts: 482 Forumite
    Hi

    I'd agree with David's excellent summary on this.

    A fixed term annuity is generally used by people who do not want to lock into today's low annuity rates, but who need income now.

    The other alternative is income drawdown. If you want zero capital risk (beware that opens you up to significant inflation risk) I would compare the guaranteed maturity amount from the fixed term annuity to the final value of an income drawdown plan, invested via a sipp in sipp deposit accounts (I use these regularly myself). With some higher fund values the return from a sipp / income drawdown / cash combination is better than a fixed term annuity, which are also influenced by currenttly low gilt yields. Of course you need to factor in costs but the sipp / income drawdown route has the added advantage that you can come out at any point over the next 5 or 10 years to buy an annuity should you so choose, this isn't always (if at all) possible with a fixed term annuity.

    Of course you might be happy to take some investment risk in which case you could look at income drawdown with some exposure to equities, bonds, property etc.

    Hope this helps.

    The Canny Saver
    Always looking for a good deal on my savings, generally risk averse, but always interested in new ideas and new ways of doing things.
  • Thanks David and Canny, some food for thought there. My IFA is going to earn his money with the questions I can now throw at him! I take the point that 1% over 10 years = 0.1% p.a., and I hadn't given any thought as to what might happen to the money "left over" from the Fixed Term Annuity.

    Thanks again, I'm sure I'll be back.
  • I was in a similar position to you a few months ago and was given a quote for a guaranteed return 5 year fixed term annuity. I am working from memory but roughly, they offered me £6000 each year which was fine - but the guaranteed return value was rubbish - at least in my opinion.

    It appears that they took 5(years) x £6000 = £30000 out of my £120000 at the start and "invested" the remaining £90000. The problem was that the effective interest rate on that investment was 1.8% per year which I felt was an appallingly bad return for supposed investment experts to achieve on what is quite a reasonable sum of money. The £30000 seemed not to earn any money at all even though most of it was in their care for several years.

    I have not gone down the SIPP route yet as I am still researching it - I have yet to be convinced that it will be any better.
  • CannySaver_2
    CannySaver_2 Posts: 482 Forumite
    I was in a similar position to you a few months ago and was given a quote for a guaranteed return 5 year fixed term annuity. I am working from memory but roughly, they offered me £6000 each year which was fine - but the guaranteed return value was rubbish - at least in my opinion.

    It appears that they took 5(years) x £6000 = £30000 out of my £120000 at the start and "invested" the remaining £90000. The problem was that the effective interest rate on that investment was 1.8% per year which I felt was an appallingly bad return for supposed investment experts to achieve on what is quite a reasonable sum of money. The £30000 seemed not to earn any money at all even though most of it was in their care for several years.

    I have not gone down the SIPP route yet as I am still researching it - I have yet to be convinced that it will be any better.

    The rate of 1.8% is poor because they are offering a guarantee over a relatively short period and therefore have to invest in gilts and other "safe" assets, although I'm sure you knew that!

    If you got them to quote over a longer period the return might have been slightly better.

    I personally prefer the SIPP route using deposit accounts and a cost effective SIPP provider who isn't going to charge the earth everytime I open / close an account. I do accept though that the fund has to be a certain size to make this worthwhile, although I would have thought yours wouldmt be far off. I also like the flexibility that I can come out of income drawdown at any point I like, if annuity rates ever rise.......*crosses fingers&

    The Canny Saver
    Always looking for a good deal on my savings, generally risk averse, but always interested in new ideas and new ways of doing things.
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