Are annuities really such a bad deal?

rpc

enator wrote: »

PS: Forgot to mention I am a handsome, youthful looking 56 year old but even so, the rate is miserably low. I can take out 7.35% on capped DD before it all changes next year.

But the DD isn't index linked and you should expect to live for another 30 years.

You've gone for an expensive product, with an expensive guaranteed income, at a time when such guarantees are unusually expensive to buy and added on expensive index linking.

No surprise that the yield isn't great.

dunstonh

Fair points, there is risk and volatility as you point out, but 7% annuity returns at 65 is presumably flat rate, so no inflation linking inflation linked annuity would be what 4-5%?

Indexed annuities are typically not great value and when you compare them to level over the same life expectancy, then there is usually little in it (for total pot paid). Peoples spending tends to go down over time and with the state pension increasing each year, that usually does the job for many.

However, investments suffer the same potential issue. It may offer potential to beat inflation and allow rises but it comes at a risk.

kidmugsy

Do income withdrawal, with your remaining "pot" invested in an ETF of TIPS (the US equivalent of Index-Linked Gilts). You might win; you might lose.

Thrugelmir

enator wrote: »

2.33%


Pitiful.


PS: Forgot to mention I am a handsome, youthful looking 56 year old but even so, the rate is miserably low. I can take out 7.35% on capped DD before it all changes next year.

How long do you expect your fund to last at 7.35%?

Is that 2.33% at 56?

Annie1960

Are annuities such a bad deal?

It depends on your circumstances. I will be converting my AVC to an annuity once the paperwork arrives in the post. I considered the options after the budget, but decided that what I want is income, not a lump sum.

So, it depends on your circumstances and what you want.

enator

Thrugelmir wrote: »

How long do you expect your fund to last at 7.35%?

Is that 2.33% at 56?

Running my spreadsheet at 6% growth on the pot shows it will not run out (the figures end when I am 87, not really bothered what happens after that).


At 5% & 4% growth it still doesn't run out but the final amount starts to get low, not that I would care by then.


If you have the discipline to stick to the GAD rates, the money will never run out before you die as you only ever take a % of the remaining pot. You might end up taking a pension of £200 on a pot of £1000, but the fact remains that the money will not expire before you do.


However, flexible drawdown is another matter...


The 2.33% is for an index linked annuity at 56 - they sent other options. Straight with no RPI was 4.24%, same but with 50% dependent's pension was 3.95%.


Funny thing is, I am not looking to retire just yet and forgot I put 56 as the preferred retirement date on my employer's pension scheme so the quote appeared out of the blue.

Linton

enator wrote: »

Running my spreadsheet at 6% growth on the pot shows it will not run out (the figures end when I am 87, not really bothered what happens after that).

So you arent bothered about the something like 50% chance you will live beyond 87? Or the much greater than 50% chance that at least one of a couple will live beyond 87? If you arent taking an annuity it would sensible to base your plans on living to a very old age.

Also the 6% return isnt steady. If you take out a fixed sum of 7.35% of initial investment from an investment pot that could drop by 50% at least once during your retirement you will find that you have a very great chance of running out of money. Look at firecalc which models taking fixed or inflation adjusted amounts of money from investments using real data. It is US based but still very relevant.

enator

Linton wrote: »

So you arent bothered about the something like 50% chance you will live beyond 87? Or the much greater than 50% chance that at least one of a couple will live beyond 87? If you arent taking an annuity it would sensible to base your plans on living to a very old age.

Also the 6% return isnt steady. If you take out a fixed sum of 7.35% of initial investment from an investment pot that could drop by 50% at least once during your retirement you will find that you have a very great chance of running out of money. Look at firecalc which models taking fixed or inflation adjusted amounts of money from investments using real data. It is US based but still very relevant.

Thanks for the input. I realise that living to a grand age is possible (not that I would want to do it), but I think that when/if you do get to that point your income requirements will be really basic.


Care costs are a possibility, but I think they are a red herring - the overwhelming majority of people do not go into care (I think the figures are something like 4% do) and with advances in tech & drugs I'm confident I will peg out sitting in a high back chair at home watching Cash In The Attic.


I have used Firecalc & the outputs are satisfactory for me as I do have other sources of income apart from the pension.


So regarding Annuities, to paraphrase the Dragons "I'm out"

showmethehoney_2

enator wrote: »

The 2.33% is for an index linked annuity at 56 - they sent other options. Straight with no RPI was 4.24%, same but with 50% dependent's pension was 3.95%.

I'm 56 too and have only looked at "Straight with no RPI" annuities and 5.22% is the going rate, for my middling size of pot at least. Also - and fair enough if you're happy with your plans, mine certainly don't seem to have met with general approval - 87 cannot be called a "grand age" even now. When we're 87 you'll probably be expected to still be working! Yeah, I know that's not quite true. Finally, and perhaps this is the pessimist in me coming out, I'm not sure I'd want to rely on 6% growth for the rest of my days. Heaven only knows what the world will look like in 2040.

p00hsticks

showmethehoney wrote: »

It's a fair point. I confess I was allowing for everyone to have their own home and to have paid off the mortgage.

Even then, unless the person has been able to get their house in tip top condition before retirement, financing any major essential maintenance items that come along from time to time such as re-roofing, replacing boilers or double glazing are going to be difficult to manage on an income of £140 a week