Why not annuitise now?

BoothBarber

We're retired, aged 62 & 61 at our next birthdays (soon). Have £8k each from indexed DB pensions. I have a DC pot of £165k, my wife has a DC pot of £55k. We also have some saving/equities. House paid off, no debts, no kids, we need £25k income to be comfortable. If I take 25% PCLS and annuitise (flat, 50% surviving spouse) I can get £5.7k. Use the PCLS to buy a PLA for wife plus annuitise her pot would give her I think £4.5k. Then 8+8+5.7+4.5 = £26.2k (£16k indexed, £10.2k flat). Which means we'd pay about £1k income tax (maybe less; PLAs are taxed differently). Of course when our SPs kick in (2019 & 2021) we're in clover.

Why shouldn't we just annuitise now? I realise we might generate more income (and risk) via drawdown but is that the only reason to not annuitise? I have read some things on these forums and in the press to the effect that annuities are not good value for people our age. I don't really understand that view even though I think I understand quite well how annuities work statistically.

BTW I used H-L's annuity quote tool for the above figures.

dunstonh

Use the PCLS to buy a PLA for wife plus annuitise her pot would give her I think £4.5k.

Whilst a PLA fits the objective generically, the commercial differences may make the lifetime annuity more attractive net of tax.

Why shouldn't we just annuitise now? I realise we might generate more income (and risk) via drawdown but is that the only reason to not annuitise?

You generate less income with drawdown than annuity. not more. That is unless you are prepared for capital erosion on your pension as you play chicken with your life expetancy.

I have read some things on these forums and in the press to the effect that annuities are not good value for people our age.

The press didnt like annuities as the Govt said you didnt have to buy them any more. When the changes were made, legislation was also changed on annuities to remove the restrictions they had in some areas. The media didnt cover those changes at all. So, you do need to be wary of what you read in the press.

BTW I used H-L's annuity quote tool for the above figures.

Although you would hopefully use an IFA rather than HL as the IFA should be cheaper than HL and get a better rate (last one I did for someone who had an HL quote found I was a bit more expensive as the pot wasnt large but still came in with a better annuity rate than HL).

BoothBarber

Thanks DunstonH, great answers.

Yes, I planned to buy through an IFA rather than H-L.

Where are you based?

Linton

BoothBarber wrote: »

We're retired, aged 62 & 61 at our next birthdays (soon). Have £8k each from indexed DB pensions. I have a DC pot of £165k, my wife has a DC pot of £55k. We also have some saving/equities. House paid off, no debts, no kids, we need £25k income to be comfortable. If I take 25% PCLS and annuitise (flat, 50% surviving spouse) I can get £5.7k. Use the PCLS to buy a PLA for wife plus annuitise her pot would give her I think £4.5k. Then 8+8+5.7+4.5 = £26.2k (£16k indexed, £10.2k flat). Which means we'd pay about £1k income tax (maybe less; PLAs are taxed differently). Of course when our SPs kick in (2019 & 2021) we're in clover.

Why shouldn't we just annuitise now? I realise we might generate more income (and risk) via drawdown but is that the only reason to not annuitise? I have read some things on these forums and in the press to the effect that annuities are not good value for people our age. I don't really understand that view even though I think I understand quite well how annuities work statistically.

BTW I used H-L's annuity quote tool for the above figures.

The main objection people seem to have with annuities is that all is lost when you die. However in your case with no kids I assume that what happens to any money remaining after you both go is of little concern. On the other hand it would seem that you only need the extra steady income for 5 years or so. Perhaps drawdown during those 5 years would be more flexible rather than paying now for unneeded long term fixed rate income which may be of little value in 25 years time

On rates - fixed rate annuities do give a higher income than can safely be taken by drawdown. With inflation-linking I think it is arguable and highly dependent on your flexibility with changing your income drawdown depending on economic conditions and whether you have sufficient margin to take risks.

woolly_wombat

BoothBarber wrote: »

Why shouldn't we just annuitise now? I realise we might generate more income (and risk) via drawdown but is that the only reason to not annuitise?

Good question and one that I have been pondering myself recently.

Here's an interesting article from the well-respected Alan Steel of Alan Steel Asset Management:
http://www.alansteel.com/media-centre/see-us-in-the-press/2015/09/beware-the-velcro-world-of-pension-freedom/

"Research last year found a majority of would be retirees didn't want an annuity, although the same majority preferred an income from their pension pot guaranteed to last as long as they or their partner did. Erm, that's an annuity folks. Using Drawdown to get higher income involves higher charges, no guarantees, exposure to stockmarkets, and needs constant expert assistance.Watch what happens when you take income and charges out a Drawdown when stockmarkets fall. Disastrous. Go ask the poor souls who tried it, (poor also as in poverty).

And it gets worse. We're living longer. Take females aged 55 now. At least half will live beyond 85. That's 30 years relying on a non-guaranteed plan to deliver higher income. Unless you have truly expert help I'd say this is ten foot bargepole country.

And if this wasn't all bad enough, while the Government didn't think it through properly (unless of course they reckoned on more taxes accruing from those daft enough to exceed their tax free cash chunk ….. not far wrong there as it turns out), the crooks got it straight away. Scammers are out in force doing their best in this rich picking environment to separate you from your hard earned pensions' savings. They promote Unregulated plans sold to the unwary and those anxious to improve their income payouts. As https://www.pension-scams.com puts it… "A Lifetime's Savings Lost in a Moment". We know of a chap who lost his £360,000 pension pot transferring it to "invest" in parking spaces in the Sahara. Yes really."

kidmugsy

Linton wrote: »

you only need the extra steady income for 5 years or so. Perhaps drawdown during those 5 years would be more flexible. ....

With inflation-linking I think it is arguable and highly dependent on your flexibility with changing your income drawdown depending on economic conditions and whether you have sufficient margin to take risks.

I agree with both points: I'd be tempted to use drawdown until your State Pensions begin, and buy index-linked annuities then rather than now.

An advantage of buying index-linked annuities rather than continuing drawdown is that as you get older, and potentially prone to muddle (aka "cognitive decline"), the annuities need no management. Plus they do the essential job of annuities; they insure you against running out of money in old age. It might be sensible not to spend every last penny on annuities, but to hold some back as emergency funds.

Linton

With investing nothing is completely black or white. Drawdown at the moment I think is helpful for people with very small pension pots, very large ones or with other sources of income. It's also useful with time varying income requirements - eg extra income before the State Pesion kicks in. But yes, for the large number of people in the middle completely reliant on DC pensions with no understanding of investing, annuities continue to be a very sensible option. On the other hand the cost of inflation matching is rather a problem.

In the future we may well see drawdown based products offered by the pension companies - perhaps generating income of a fixed % of the pot or having the power to vary the income between limits. But at the moment many people could be headed for poverty in their 80's and beyond.

Thrugelmir

Drawdown is a fad. I waiting to see how long it is before the sob stories hit the media. Risk is such a badly understood concept.

chucknorris

Thrugelmir wrote: »

Drawdown is a fad. I waiting to see how long it is before the sob stories hit the media. Risk is such a badly understood concept.

Can you please elaborate? What problems can you foresee?

macca1974

nothing at all wrong with annuities if what you are looking for is certainty of income and you aren't bothered about what happens to the capital after you die. Very sensible in fact. I imagine that there are a fair few people regretting going into drawdown last year who might well have seen a decent sized drop in their pension funds due to the markets.

Just as a brief thought thought, it might be worth looking at the difference in income that a 100% widows benefits would bring in compared to 50%. As your wife is a similar age to you, it shouldn't cost that much more and assuming that you are both in decent health, women generally seem to outlive men, so it might well be worth considering.

Linton

Another thing worth looking into is the guarantee period. This means that the pension continues to be paid for a period after the annuity is started even if the annuitant dies in the meantime. So it provides useful extra income for the spouse, effectively life insurance.

The default guarantee period seems to be 5 years. It is pretty cheap to increase this to 10 years.