Advice on Annuity Option

choi

Just about to make my final decision on way forward for my Annuity

Option 1

£250k Pot
Joint Life 50% Spouse
RPI
100% Value Protection

This will pay me £6.6 k pa

And cannot be changed

Option 2 a

Fixed Term Annuity
Single Life
Fixed Term three years paying 6% pa [Total £45,000.00]
Level
3 year Guarantee Period
No Value Protection
No Tax Free

Guaranteed Maturity Amount after three years £213,400.00

Option 2 b

Fixed Term Annuity
Single Life
Fixed Term three years paying Zero % pa [Total £Zero]
Level
3 year Guarantee Period
No Value Protection
25% Tax Free £62500.00

I would use some of this over the next three years and put the remainder in a three year bond

Guaranteed Maturity Amount after three years £194,300.00

NOTES

I was keen on option 1

However I have developing health issues and like the idea of buying some time.

I can then see how things work out and go either with another annuity at age 70
Or even Drawdown in three years time

I would really appreciate your comments

As many of you know this has been a hard struggle for me

So please go easy

westv

Yet another thread! Why not just update one of the other dozen you have started?

choi

westv wrote: »

Yet another thread! Why not just update one of the other dozen you have started?

Because I'm nearing my destiny and didn't want people to have to wade through lots of comments

jamesd

Option 1 is clearly bad because it pays both you and your spouse less than state pension deferral. No reason to knowingly take less income.

Option 2b you start with 250000 get out 62500 and are paid 194300 after three years. That's 6800 increase which is 3.62% gain on the 187500 left after taking the tax free lump sum. Roughly the same as interest on a drawdown account, so it qualifies as a least bad choice.

Option 2a just looks silly because you lose the tax saving from the taking of a tax free lump sum. 250000 in, 45000 + 213400 = 258400 out. So 8400 up. But a 25% tax free lump sum of 25% of 250000 is 62500 and this option effectively makes you pay 20% income tax on that, costing you 12500. So it actually makes you worse off by 12500 - 8400 = 4100. At least the 45000 uses your income tax personal allowance for the three years.

As is 2a looks worse than 2b but you can probably make it better like this:

A take 25% tax free lump sum of 62500
B buy the annuity for the remaining 187500. This would reduce the other numbers to about 187500 / 250000 = 0.75. So about 33750 over the three years and about 160050 guaranteed maturity amount.

Because this modified version both preserves the tax free lump sum benefit and lets you use your income tax personal allowance it'd beat 2b and 2a.

So priority order would be:

modified 2a
2b
unmodified 2a
1, which I couldn't with good conscience support in any way

choi

Thanks for your reply and help

jamesd wrote: »

Option 1 is clearly bad because it pays both you and your spouse less than state pension deferral. No reason to knowingly take less income.

Could you please explain this more clearly Thanks


Option 2b you start with 250000 get out 62500 and are paid 194300 after three years. That's 6800 increase which is 3.62% gain on the 187500 left after taking the tax free lump sum. Roughly the same as interest on a drawdown account, so it qualifies as a least bad choice.

Option 2a just looks silly because you lose the tax saving from the taking of a tax free lump sum. 250000 in, 45000 + 213400 = 258400 out. So 8400 up. But a 25% tax free lump sum of 25% of 250000 is 62500 and this option effectively makes you pay 20% income tax on that, costing you 12500. So it actually makes you worse off by 12500 - 8400 = 4100. At least the 45000 uses your income tax personal allowance for the three years.

As is 2a looks worse than 2b but you can probably make it better like this:

A take 25% tax free lump sum of 62500
B buy the annuity for the remaining 187500. This would reduce the other numbers to about 187500 / 250000 = 0.75. So about 33750 over the three years and about 160050 guaranteed maturity amount.

I like the 3.6% gain
But I would be concerned at this being lost due to inflation

Because this modified version both preserves the tax free lump sum benefit and lets you use your income tax personal allowance it'd beat 2b and 2a.

So priority order would be:

modified 2a

I like the look of this
2b
unmodified 2a
1, which I couldn't with good conscience support in any way

choi

What are people's thoughts on Fixed Term Annuities

Over a few years they look like a good alternative to drawdown
With a fair return

I may even consider a five year option based on the advice from jamesd

Please let me know what you think

Are there any serious downsides

jamesd

For you I think that the type where you take the whole tax free lump sum, get some ongoing income and have a guaranteed value at the end is a pretty good fit. So modified 2a looks quite good.

I saw your other questions and will probably write more later in the week.

choi

jamesd wrote: »

For you I think that the type where you take the whole tax free lump sum, get some ongoing income and have a guaranteed value at the end is a pretty good fit. So modified 2a looks quite good.

I saw your other questions and will probably write more later in the week.

Thanks James
Much appreciated

This has been a difficult journey for me
People like you have been fantastic