Future annuity rates? Any guesses?

[Deleted User]

Recently suddenly widowed, having managed my husbands flexible drawdown sipp, successfully and with good growth. I need to get my own affairs in order now that I am getting older and stability is appealing. I am thinking maybe a partial annuity to give me a stable income base throughout the ups and downs of stockmarket fluctuations.

Thoughts welcome please

kidmugsy

It depends on long term interest rates. Even short term rates are unpredictable - see chart 1.
http://blog.redington.co.uk/Articles/Dermot-Dorgan/May-2014/WAITING-FOR-RATES-TO-RISE.aspx

kidmugsy

Four other points.

(i) Have you had all the tax-free lump sum out? If not it might be wise to, before some politician starts interfering with that. (Balls, I hear you say.)

(ii) You could always buy a "ladder" of gilts, taking out the value of each as it matures. This would mimic an annuity, without taking the risk of permanently fixing that part of your income.

(iii) Has your State Retirement Pension begun, or will it do so before 5th of April 2016? If so, you can buy the equivalent of an annuity, presumably index-linked, by deferring your pension. It pays 10.4% extra pension for every year of deferral. You could draw extra from your husband's pot to compensate for the temporary loss of income.
https://www.gov.uk/deferring-state-pension/what-you-may-get

(iv) Similarly, you could in addition consider making National Insurance Contributions Class 3A ("3ANICs") in the autumn. That too is equivalent to buying an annuity on better terms than are available commercially.
https://www.gov.uk/government/publications/additional-state-pension-top-up

[Deleted User]

Thank you both for your input. I vested the sipp for him 5 years ago and we have taken the 25% cash plus a pension for 4 years. I am 67. The ladder of gilts is very appealing kidmugsy. I bought and sold gilts quite a few years ago, so yes that is a very good option and one that I will look into. I can`t do anything until after the 6th april anyway as I was given the option of deferring any decision re the sipp, I will continue in flexi drawdown after that date whilst I consider my options further but it is all on hold for now. I appreciate what you both contributed. I am now off to look at my gilt charts on my charting software (I use it for stocks)

kidmugsy

kittie wrote: »

I am 67.

Then deferring your state pension for up to three years might be a pretty effective way of buying annuity-like income. Far better than you could get commercially.

kidmugsy

Here's what gilts are up to at the mo'.
http://markets.ft.com/research/Markets/Bonds

atush

When bank rates rise, gilts will rise. then annuities will rise.

But I like the deferring idea for you. do it now and get 10.4%.

kidmugsy

OP, I suggest you google "Strong currents that keep interest rates down" which will take you to an FT article by Martin Wolf.

I thought this bit rather plausible.
"There is a more convincing story about why interest rates are so low. It is that the equilibrium real interest rate — crudely, the interest rate at which demand matches potential supply in the economy as a whole — has fallen, and that central bankers have responded by cutting the nominal rates they control. ....
The most plausible explanation lies in a glut of savings and a dearth of good investment projects."

In other words, it's not all the fault of the central bankers - they are just acknowledging reality. Could be.


Part of the problem might be demography, part the endlessly increasing regulation of businesses, part the bureaucratisation of science, part the decline in real educational standards, part that the "low hanging fruit" has already been harvested, part that the modern way of paying senior executives biases them against making big productive investments, .... and as many other possibilities as you might care to guess.

Loughton_Monkey

There is no 'magic bullet' here at all. There are hundreds of different strategies for taking retirement income, but each one can only be a personal preference and on average, 50% will 'win' and 50% will 'lose'.

Let's look at it logically. Initially, let's forget any concept of growth/interest/investment yield and forget 'charges' to financial institutions for managing our money.

The concept of an annuity is very legitimate. It is simply the reverse of Life Insurance. We can all save for our retirement, then we 'pool' our money, and a mathematician who knows how long we live and our death rates can calculate the 'correct' amount we can all take from the fund to live on.

People who die 'young' can be deemed to have 'lost out', but those who live a very long age can be deemed to have 'won'. It is paid for exactly by those who died young.

Many would say this is a 'perfect' arrangement, except human behaviour (in the guise of dependents) dictates that when the pensioner dies young (half of them) the potential heirs cry 'foul'.

When you analyse it, what we all seem to be craving for is the best of both worlds. We want to manage our fund in a way that (a) we can grab an income at least equal to the annuity rate, and (b) ensure that we still have money once we reach above average age and (c) let our children have the remains of the pot if we die young.

Quite frankly, I don't know any 'sure fire' way of doing this. It just seems impossible.

What we all seem to be hoping, it seems, is that we can configure our investments and drawdown in a way that (a) our money obtains significantly more growth than boring old bonds, and (b) the charges taken out of our money overall are engineered lower than what a standard annuity provider takes out. So if you take 'risk' and 'competition' into account, I'm not sure that's possible.

What it boils down to, therefore, is tossing one's own coin to decide whether we will pop our clogs before, or after our due time. Given that I have some 'forced' annuities [FS pension schemes] I clearly come down in favour of using drawdown (and drawing down at the 'thick' end). But I don't know what I would do if my entire retirement fund was in a cash pot.

jamesd

kittie wrote: »

I am getting older and stability is appealing. I am thinking maybe a partial annuity to give me a stable income base throughout the ups and downs of stockmarket fluctuations.

kittie wrote: »

I am 67.

Defer your state pension. This increases your state pension by 10.4% for each ear of deferral, pro-rated for shorter times. Inflation-linked for life. A comparable annuity would pay out only around 3% of the money you spend to buy it, a far worse deal. You can defer once even if you have already claimed your state pension.

Unless the pension pot is worth at least ten times your current state pension or your health is not normally good you should forget about annuities because they offer a worse deal than you can get from the state pension. There's also a cap on the maximum possible Additional State Pension but that's around £250 a week so most people won't get there.

If you have enough money to afford deferring for at least five years, also consider purchasing an extra £25 a week of state pension via Class 3A National Insurance contributions, near to the end of the 18 months when that offer is open to you, starting this autumn.

I'm assuming that you are in normal good health for your age. If you are not, then an enhanced annuity might pay out more, but only if you are very likely to die within a fairly small number of years.

If you want a fairly stable investment to use, Newton Real Return did well during the big drops in 2008 and offers quite decent investment returns.

If you can say more about your current state pension entitlement and the amount of money in your pension pot it may be possible to offer additional guidance.