A level annuity is the best retirement income option

FatherAbraham

Isn't it?

All "safe withdrawal" rates for drawdown are just wishful thinking. Indeed, the collective risk-pooling of an annuity means that one has no need to hold reserves against longevity.

I used to think that an inflation-linked annuity was the way to go, but given the buffering effect of the state pension's inflation protection, the downside risk of a level annuity is somewhat mitigated, and it's better to self-indie by not sleeving all of one's income in the early years.

I'm conscious that there's a potential contradiction in this reasoning - desiring the longevity-risk pooling of an annuity, yet rejecting the inflation-risk insurance of an escalator.

garmeg

If you are 70 plus maybe. Under age 70 at current rates? No way.

Albermarle

Also with an annuity you are guaranteeing nothing left for your heirs/will beneficiaries.

FatherAbraham

garmeg said:

If you are 70 plus maybe. Under age 70 at current rates? No way.

The market conditions, which make annuity rates look "low", apply to all income-generating assets. There really is no free lunch.

DaveMcG

There can be a free lunch if you outlive the insurance companies' expectation of your lifespan.  This is quite unlikely if you take out an annuity at age 60 (as the insurance company will expect you to live well into your 80s and many illnesses could appear in that period)  and the "winning payout" will be at an extreme age, diminished by inflation and at the expense of many years of frugality (ok bit of an exaggeration).  However, an annuity taken out at age 75, if you have the fortune to find yourself in very good health, could well beat the insurance company with the "winning years" much less eroded by increased living costs.

garmeg

FatherAbraham said:

garmeg said:

If you are 70 plus maybe. Under age 70 at current rates? No way.

The market conditions, which make annuity rates look "low", apply to all income-generating assets. There really is no free lunch.

Perhaps but annuity rates are bargepole territory under age 70 imo.

OldMusicGuy

I plan to annuitise a chunk of my DC pot when I get to 70 - 75 age range. I always assumed I would go for an escalating/inflation linked but I would definitely think of level annuities as a possibility, maybe "laddered". 

FatherAbraham

Albermarle said:

Also with an annuity you are guaranteeing nothing left for your heirs/will beneficiaries.

And that is the point of the title of this thread: "retirement-income option"

FatherAbraham

DaveMcG said:

There can be a free lunch if you outlive the insurance companies' expectation of your lifespan.  This is quite unlikely if you take out an annuity at age 60 (as the insurance company will expect you to live well into your 80s and many illnesses could appear in that period)  and the "winning payout" will be at an extreme age, diminished by inflation and at the expense of many years of frugality (ok bit of an exaggeration).  However, an annuity taken out at age 75, if you have the fortune to find yourself in very good health, could well beat the insurance company with the "winning years" much less eroded by increased living costs.

I think you are wrong, because you're comparing two quite different things. In particular, the person, who waited until 75 to buy an annuity, obviously didn't die before reaching 75.

Buying an annuity earlier leads to better outcomes for someone who survives longer, because he or she reaps the benefits of those in the pool who die younger.

Annuities should be bought as young as possible, if one is concerned with maximising one's lifetime periodic income.

It's curious and intriguing that so many people argue the opposite case.

garmeg

OldMusicGuy said:

I plan to annuitise a chunk of my DC pot when I get to 70 - 75 age range. I always assumed I would go for an escalating/inflation linked but I would definitely think of level annuities as a possibility, maybe "laddered". 

That is my thinking too.

Annuitise 33% at age 65, 50% of the remainder at 70 then 100% of the rest at 75 whilst drawing down the fund at 0.25% per month.

Annuitising 25% at age 60 feels too soon, especially at rubbish rates, even though i plan to retire at 58.

My low DB (in payment, taken 5 years early) plus state pension from 67 will cover the basics, just about.

OldMusicGuy

FatherAbraham said:

Annuities should be bought as young as possible, if one is concerned with maximising one's lifetime periodic income.

It's curious and intriguing that so many people argue the opposite case.

I won't be using annuities to maximise my lifetime income, I will be using them to provide a low risk and secure income base as I get older and don't want to manage my investments any more.