annuity rates

jamesd

karol, what is your investment experience? How much decrease in value of your investments during a bad year could you accept without losing sleep, knowing that in a few years the value (and your investment income!) would recover? Do you want the certainty of an annuity or would you prefer the potential for higher but more variable income with drawdown? Is there any reason to believe that you will live significantly fewer years than average due to smoking, weight or health problems that increase annuity rates?

You might also consider buying a level annuity but investing the difference between a level and 5% escalating annuity in a stocks and shares ISA. The level annuity spending power will gradually reduce through inflation but it provides a predictable income. The investing of the difference can grow by more than inflation to offset that reduction and the gradual investing of the money reduces the investment risk. Since you can take lump sums from this ISA pot at any time it's a useful way of building up a reserve for unexpected health care bills or other problems.

What is the rest of your retirement income? That might make some approaches to income generating better than others, for example if your taxable income is over 21,000.

EdInvestor

karol wrote: »

After taking a lump sum from my pension I will be left with 53,000 what is the best annuity rates on offer ? I understand this is not viable for income withdrawal.

Thew first thing to look at when deciding on the 'viability' of drawdown is how much guaranteed (and preferably inflation linked) income is coming in from other sources, eg state pensions ( forecast here: https://www.thepensionservice.gov.uk) and other pensions.

Then there is the qurestion of age: the younger the retiree the more likely drawdown will be sensible at least for a period, because annuity rates for young people (especially women) are derisory these days.

The third thing is to set up a drawdown plan which custs costs and charges to the absolute minimum so the income goes to you, not to some fund manager or advisor. You need a simple but well organised investment strategy aimed at paying out a growing income while also increasing the capital.It requires a bit of effort at the start, but can pay great dividends in a comparatively short time, whereas with the annuity you are condemned to a declining income over the years due to inflation.

Note also that a drawdown can be the safest way to obtain a retirement income (safer than an annuity) if it is invested in gilts and you are happier with a lower amount in return for maintaining the ability to pass on the capital as a lump sum (minus 35% tax) on death.

dunstonh

Average size of pension fund used to buy an annuity last year was just under 24,000. This fund is more than double the size, it's not small.

Its still small. A pension fund is considered trivial at £17,000 (HMRC).

The third thing is to set up a drawdown plan which custs costs and charges to the absolute minimum so the income goes to you, not to some fund manager or advisor.

Daft comment as the cost of an adviser may just be a one off amount of 0-1%. Getting it wrong can cost you far more.

Note also that a drawdown can be the safest way to obtain a retirement income (safer than an annuity) if it is invested in gilts

Please provide evidence to support your comments that drawdown is safer than an annuity.

jamesd

EdInvestor wrote: »

Note also that a drawdown can be ... safer than an annuity ... if it is invested in gilts

The annuity gets you a fixed rate possibly with inflation increases. The gilts, if being purchased regularly, expose you to variability in gilt rate of return over the years. Annuity rates have been declining in recent years because of declining rates of return, so locking the rate in at the start has some significant safety advantage for someone who wants high predictability and accepts the low return on investment delivered by annuities and gilts.

It's not really practical to buy all of the gilts at the start of retirement so it's not really practical to avoid the risk of gilt yield variations.

What is your estimate of the reduction in yield of gilts in drawdown compared to an annuity? The gilts have the fees for running the account, calculating allowable drawdown amounts and perhaps annual management charges if in a fund. The annuities don't have most of this. Both share the cost of actually making the regular payments but drawdown costs for taking an income are likely to be higher than the bundled charge in an annuity.

EdInvestor

Gilts are Government debt.Buying a gilt (not a gilt fund) and holding it to maturity gives you a guaranteed income and a guarantee of the return of all your capital if you hold to maturity.

Annuities are primarily invested in gilts because they are the safest investment around.But with an annuity you are exposed to insurance company risk.if the insurance company goes bust you could lose out. Additionally of course you lose the capital when you buy the annuity.

If you buy gilts directly you maintain your ownership of the capital, with no risk as long as you hold to maturity and get an income guaranteed by the Government - that's as safe as you can get. It's entitrely practical to buy gilts directly in a SIPP, the normal vehicle used for drawdown.

Once purchased there are no costs involved in holding gilts in an online SIPP with no annual fee, such as the ones at https://www.sippdeal.co.uk or https://www.alliancetrust.co.uk. Such SIPPs will typically charge around 10 pounds per payment to send you your income - many people like to take it upfront once a year and place it in the bank to earn interest, drawing it out as needed. This keeps costs to a minimum.

jamesd

It's possible to buy gilts and hold to maturity. Now tell me how I can do it today with 53,000 to produce RPI escalation with monthly payments for 30 years. If monthly is too tough, go for annual. RPI too tough, since you don't know what RPI will be? OK, try 5% escalation instead. If today's too tough, you can use a mixture of all the gilts that have been available for the last year.

What yield do you get on those purchases? How does it compare to the yield of the annuity that uses up the capital to leave you with none when you're dead, while the gilts have to deliver their yield without using the capital?

Then tell me the cost of all the purchases and sales involved, sales because I strongly doubt that you'll be able to do it by holding to maturity.

Your concept is fine. The realistic prospect of being able to do it economically is what's lacking. It can work nicely as part of the mix with other investments but that's not comparable to the certainty and ease of use of an annuity.

Do remember that I'm no fan of annuities, just like you. But they do have their uses.