Fixed term annuity

Malthusian

jayjays wrote: »

My father in law has recently invested in a 2 year Tesco Corporate Bond 5.5%, I have been unable to establish if this is "guaranteed", maybe I need a new thread to gain more understanding !

It's not guaranteed. If Tesco goes bust he will lose all his money. I hope he's invested less than 5% of his portfolio; if he's invested a significant amount "because Tesco are a big name" (like BHS and Carillion) he risks ending up as a cautionary tale in the Your Money section of the Daily Mail.

Re OldMusicGuy's post, I don't think he's actually suggesting that you should cash the whole SIPP in and reinvest it in a cash bond, I think he's just pointing out what poor value it is.

All a fixed term annuity does is pay your own money out to you, which you could do by leaving it in cash in the SIPP and taking withdrawals directly from it. You are trading a 1% per annum return for the loss of control for five years.

OldMusicGuy

Malthusian wrote: »

Re OldMusicGuy's post, I don't think he's actually suggesting that you should cash the whole SIPP in and reinvest it in a cash bond, I think he's just pointing out what poor value it is.

Yup, that's it. If you use 115,000 to generate 5x 7590, that means you are getting 37,950 in cash payments over 5 years. So if you had 115,000, kept the 37,950 to one side then you could put 77,050 into a cash bond and get a better return than the annuity (and you could also invest some of the annual income payments in shorter term bonds). But of course the tax implications would have an impact - if you took a 115,000 SIPP as a lump sum, only 25% is tax free so you wouldn't have all the 115,000 to invest. Also the interest itself could be subject to tax.

So it will depend on how you approach this and your tax position, but the annuity doesn't look like great value to me right now. I don't discount the use of annuities in retirement but for me, I will likely be using them when I am older and the rates are a bit better.

dunstonh

And if you end up rolling over the fixed term annuity for another 5 years or so, you effectively end up with around 60% of your value in real terms after 10 years.

Taking no investment risk can actually increase your risk of capital loss in real terms. Risk is not on-off. Every option has risks. Avoiding investment risk more or less guarantees inflation risk and shortfall risk. Whereas investment risk may only suffer inflation risk and shortfall risk.

jayjays

As always thanks so much for your comments, really appreciated :-

Redux :- yes 1.15%(even better), I couldn't be bothered with the bit after the point
Malt :- I will tell him, I knew it couldn't be guaranteed, he was convinced it was.
OMG :- i forgot to say my pot is already net of tax free cash
Dunston :- yes I see your point ref Capital loss.

Conclusion :- i am 61 and have worked hard for the little bit I've got, I love a bet and think nothing of putting £500 on a horse or greyhound for that matter. I spent most of the 80's playing with shares and had a lot of fun whilst probably breaking even.
This Sipp has benefited from 40% Tax relief, so I already feel like a winner, however I went back to work (which I hated much of the time) to build it and would regret losing even a single £ of it, I don't see it as Capital, I regard it as wages.
With the way the market has gone over the last decade, yes I wish I had been on board with my cash Isa's etc, I have to listen to friends gloating about how much they are making in funds almost daily, but i can live with that in the knowledge my small growth is guaranteed :-)
Just had my IFA chat (compulsory with MPE) and the latest quote is £6500 for 5 years (yearly in advance) with a guaranteed £88404 at end,which is £239 better than original

Thanks again

greenglide

and have worked hard for the little bit I've got,

And ....

I love a bet and think nothing of putting £500 on a horse or greyhound

Don't seem to go very well together.

Your SIPP has benefitted from 40% tax relief (implying higher rate tax payer) yet you talk about "the little bit I've got". Spending more than is wise?

Thrugelmir

dunstonh wrote: »

Whereas investment risk may only suffer inflation risk and shortfall risk.

Not forgetting political risk, liquidity risk to name a couple of others.

Forecasting the next 30 years is quite simply impossible.

Many investors develop cognitive bias over time.

jayjays

Thanks for the concern green :-)
The "little bit" is referring to this Sipp being 15% of my overall pension
The reference to "having a bet" is demonstrating I'm not risk averse with my pocket money, in fact I'm currently trialing a system involving US racing, maybe I can make my fortune (tax free) :-)

Wish me luck

coyrls

I think you have demonstrated admirable self-knowledge; if the alternative to purchasing a fixed term annuity is spending the cash on “a system involving US racing” then the fixed term annuity is by far the better option in my opinion

jayjays

Thanks red, I don't doubt I could do a little better, but to be honest I'me tired of investing and the resulting paperwork,you stated earlier you would consider my option later in life, well I feel I'm already there, income up to the 40% was my main goal and I am pretty much there...... happy days

jayjays

Shame on you coyris, selecting one investment over another without knowing the detail

Thanks anyway