Are annuities really such a bad deal?

showmethehoney_2

greenglide wrote: »

Assuming that the "cannot work" is for medical reasons then can you not still get NI credits when your savings / income disallow you from the benefit?

Thanks. Yes, I believe I could, but the process it too intrusive and I'd rather buy the extra stamps.

GingerBob_3

When you invest money in a bank, you expect interest :rotfl:, but you don't give away your capital to the bank. With an annuity you're getting interest, or the equivalent, but you've given away the capital! How can that possibly be good. Well, ok, there may be some cases where it makes sense, but come on - you wouldn't give away capital under any other circumstances (sorry if this has already been discussed elsewhere).

Linton

GingerBob wrote: »

When you invest money in a bank, you expect interest :rotfl:, but you don't give away your capital to the bank. With an annuity you're getting interest, or the equivalent, but you've given away the capital! How can that possibly be good. Well, ok, there may be some cases where it makes sense, but come on - you wouldn't give away capital under any other circumstances (sorry if this has already been discussed elsewhere).

Its not the interest you are particularly after with an annuity, the value lies in the guarantee that if you live to an old age you will continue to be paid long after your savings would have been used up.

If you had no deserving dependents or really needed the income why wouldnt you be perfectly happy to give up capital for a guaranteed income higher than the interest - you cant take it with you.

kidmugsy

GingerBob wrote: »

When you invest money in a bank, you expect interest ... but you don't give away your capital to the bank.

You have missed the point of an annuity. When you lend money to a bank you expect interest, sure. But an annuity is a mutual insurance by the annuitants against any of them outliving their capital. Is that really too hard to understand?

Eric_the_half_a_bee

GingerBob wrote: »

When you invest money in a bank, you expect interest :rotfl:, but you don't give away your capital to the bank. With an annuity you're getting interest, or the equivalent, but you've given away the capital! How can that possibly be good. Well, ok, there may be some cases where it makes sense, but come on - you wouldn't give away capital under any other circumstances (sorry if this has already been discussed elsewhere).

The annuity payments don't represent interest. They represent interest plus a repayment of capital, in much the same way that payments on a traditional repayment mortgage represent interest plus a repayment of capital.

And in the same way that payments on a repayment mortgage will typically be higher that payments on an interest only mortgage, payments on an annuity will be higher than interest from the bank.

GingerBob_3

kidmugsy wrote: »

You have missed the point of an annuity. When you lend money to a bank you expect interest, sure. But an annuity is a mutual insurance by the annuitants against any of them outliving their capital. Is that really too hard to understand?

Where's the 'rolls eyes' icon?

Yes, I'm fully aware of what an annuity is! I was drawing a comparison. Let's try another one:

An annuity is like buying something for 100,000s of pounds that other people are getting for free - granted, with a bit of management/effort required. Yes, there's the aspect of it being guaranteed, but these products are such incredibly bad value - in a general sense - that I'm exteremely relieved that I've escaped having to buy one.

kidmugsy

If you don't want your comparison mocked, don't make foolish comparisons.

GingerBob_3

kidmugsy wrote: »

If you don't want your comparison mocked, don't make foolish comparisons.

Really? Well it's actually a good comparison, which well illustrates the exceptionally bad value for money you get with annuities.

dunstonh

An annuity is like buying something for 100,000s of pounds that other people are getting for free

Please provide details a bank account that provides a guaranteed interest rate for life at 2.5 to 4 times the current interest rates?

Linton

GingerBob wrote: »

Where's the 'rolls eyes' icon?

Yes, I'm fully aware of what an annuity is! I was drawing a comparison. Let's try another one:

An annuity is like buying something for 100,000s of pounds that other people are getting for free - granted, with a bit of management/effort required. Yes, there's the aspect of it being guaranteed, but these products are such incredibly bad value - in a general sense - that I'm exteremely relieved that I've escaped having to buy one.

What are you talking about? £100,000 for things that other people are getting for free???? What things?

Annuities are expensive, but they are not "incredible bad value". Guarantees are expensive to provide. Any "safe" alternative such as relying on bank interest would provide a lower income and would also require a larger pot because you would have to plan for an unusually long life. With an annuity you pay based on an average life expectancy.

Or you rely on investment returns. These are not guaranteed. If you try to take a steady income during good and bad times you will find that the % you can take out safely is pretty close to an annuity - see firecalc. Taking a constant £6K from a £100K investment has a 10% chance of running out of money during a period of 30 years based on historical data.

And of course how will you feel relying on investment income during the next 50% stock market crash?

The key difference is whether you will have any money left when you die. If you care deeply then dont use an annuity. Another factor is whether you can live with a variable income and are capable of managing a large investment portfolio. If the answer to both is yes, then dont use an annuity. For anyone else in my view annuities can provide the best option for retirement.