A level annuity is the best retirement income option

FatherAbraham

Brynsam said:

FatherAbraham said:

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.

So what's the point of your thread? If you think it's the best option, fine. Others may disagree; depends entirely on circumstances and attitude to risk. 

To see if there are some interesting and plausible counterarguments to the assertion that the best result for the average person is likely to be really annuitisation.

I'm quite conscious of the dangers of over-confidence, so I like to get a range of opinions. I know that's possibly a novel concept for some people, who prefer to seek confirmation of their foregone conclusion, minimising the uncomfortable cognitive dissonance of disagreement.

After all, this board has to be about a bit more than just tedious technical questions about GMPs, doesn't it?

HappyHarry

FatherAbraham said:

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.

This, of course, depends on how large a proportion of the total income is made up from the state pension and how much from the annuity. For those with a small annuity, the state pension increases will, as you say, help buffer the impact of inflation. However, for an individual with an annuity that is much larger than the state pension, then inflation could have a serious impact on that individual's income over many years.
The younger that someone is when they take a level annuity, the more serious the impact of inflation would be over the long term.
If the suggestion is that some of the income could be saved in the early years to help reduce the impact of inflation, then another option could be to purchase a smaller annuity initially, and keep the remaining funds in a tax efficient pension wrapper until further income is needed.

Just to add, this assumes that the individual is looking to start drawing an annuity at the same time as they draw their state pension, which, due to the increase in state pension age, is less likely than it would have been twenty years ago. If the individual is looking to retire earlier than state pension age, then they will either need separate savings to manage on, or they may need to consider pension drawdown for a few years until state pension age, in order to provide a steady income stream through retirement.

cfw1994

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.

https://www.sharingpensions.co.uk/annuity-rates-chart-latest.htm

Annuity rates have continued to trend down.  You assert that all income generating assets do the same: I disagree, based on the fundsheets for my DC scheme.
I do agree that taking one life (75+) might make some sense....but for the option to pass on inheritance cash and also flexibility in how to draw, I will mostly be funded by DC pots in drawdown fashion: I’d be crazy to swap that for annuities.

nigelbb

FatherAbraham said:

given the buffering effect of the state pension's inflation protection

Your total pension income would have to be very low for the triple lock of the state pension of £9,100 per annum to be considered significant in your financial planning.

Notepad_Phil

If you've got enough money then I can see that an annuity might well be the 'best' option for somebody who can afford to use the low rates that annuities are currently at. However I would have thought that somebody who was that risk averse that they would prefer to buy an annuity at age 60 rather than use drawdown, would have wanted to also cover themselves against the inflation risk.

My MIL has several level annuities that she bought many years ago when rates were not so bad (but then inflation was also higher), and I'm just glad that she also kept a big chunk of her money in investments as there is no way that she would be able to keep her current level of expenditure/comfort if it had not been for the inflation busting income from those investments.

jimi_man

nigelbb said:

FatherAbraham said:

given the buffering effect of the state pension's inflation protection

Your total pension income would have to be very low for the triple lock of the state pension of £9,100 per annum to be considered significant in your financial planning.

Well for a couple that's £18k. At age 75, £200k buys you £12k of a level annuity with 50% joint life, so that's £30k in total for a couple, which equates to around £2400 a month - not totally disasterous. 

Malthusian

I think the whole "I'll buy an annuity at 75 when the rates are better and I won't want to spend as much time managing my finances" thing is more likely to be said than done.

Having successfully navigated the waters of drawdown for 10-15 years or more, are you really going to decide that you really need an annuity now, when if you were going to exhaust the pension it would already have happened? Your expenditure may be declining at this point as you become less active*, the threat of exhausting the fund is significantly diminished with your declining life expectancy.

If you are above the Inheritance Tax threshold, pension annuities are mad from an Inheritance Tax perspective. If you have assets subject to 40% tax on death and assets which aren't, it's not the latter you want to pay an insurer in exchange for an income which ceases on your death.

Declining faculties can be counteracted by appointing good Attorneys and an Independent Financial Adviser. DIYers may balk at that, but being so against taking professional advice that you'll hand over all your capital to an insurer rather than continuing to manage it with some help makes no sense. "I didn't want a gardener coming round because I knew they'd get it wrong, so I burned the garden to the ground and salted the earth."

*"Ah but care costs" somebody says. Buying an annuity to cover care costs is a completely different decision from buying an annuity because you're 75 and the rates are a bit higher. When you go into care you can get an Immediate Needs Annuity, if you and your attorneys are that way inclined. Not only are the rates even "better" still than for a still compos mentis 75 year old, but they're far more tax-efficient than pension annuities. They reduce the value of the estate and the entire annuity is paid to the care home tax free (unlike purchase life annuities where part of the annuity is deemed to represent return on investment and is taxable as income). Meanwhile your pension fund can continue to grow free of tax.

If you have expensive care needs that create a serious threat of exhausting your capital, the last thing you want is to have already spent your resources on an annuity that didn't take into account those needs during underwriting.

OldMusicGuy

Malthusian said:

Having successfully navigated the waters of drawdown for 10-15 years or more, are you really going to decide that you really need an annuity now, when if you were going to exhaust the pension it would already have happened? Your expenditure may be declining at this point as you become less active*, the threat of exhausting the fund is significantly diminished with your declining life expectancy. 

In my case, probably. But I won't buy "an annuity". I will likely annuitise some of the DC pot to ensure that I have a risk free income floor that provides more than just SP (which is my only other source of income). I am driven by factors other than the pure financial aspect because I am very risk averse. And as a DIY'er I won't hand over the running of my affairs to an IFA. To use your analogy, there are plenty of rubbish gardeners out there, same as there are plenty of rubbish mechanics, accountants and whatever profession you care to mention. I'm not prepared to entrust my financial affairs to someone later in life when I might find it harder to push back or question what they are doing if they turn out to be one of the rubbish ones. 

It also depends on my wife's situation and health, as that also has a big impact on how the DC pot will be used. Everyone's personal circumstances will be different and I can certainly see annuities playing a role for me later in life. But until I get there I won;t know for sure...... 

FatherAbraham

Well, the garden-destruction metaphor made me chuckle, but it does in fact happen, and is generally considered unremarkable, rather than the work of a lunatic.

Several aging neighbours in my area have destroyed pleasant, green gardens in favour of "low-maintenance" concrete paving, anti-weed membranes and shingle. I've even reversed one of those conversions on buying a house.

[Deleted User]

Malthusian said:

I think the whole "I'll buy an annuity at 75 when the rates are better and I won't want to spend as much time managing my finances" thing is more likely to be said than done.

Having successfully navigated the waters of drawdown for 10-15 years or more, are you really going to decide that you really need an annuity now, when if you were going to exhaust the pension it would already have happened? Your expenditure may be declining at this point as you become less active*, the threat of exhausting the fund is significantly diminished with your declining life expectancy.

If you are above the Inheritance Tax threshold, pension annuities are mad from an Inheritance Tax perspective. If you have assets subject to 40% tax on death and assets which aren't, it's not the latter you want to pay an insurer in exchange for an income which ceases on your death.

Declining faculties can be counteracted by appointing good Attorneys and an Independent Financial Adviser. DIYers may balk at that, but being so against taking professional advice that you'll hand over all your capital to an insurer rather than continuing to manage it with some help makes no sense. "I didn't want a gardener coming round because I knew they'd get it wrong, so I burned the garden to the ground and salted the earth."

*"Ah but care costs" somebody says. Buying an annuity to cover care costs is a completely different decision from buying an annuity because you're 75 and the rates are a bit higher. When you go into care you can get an Immediate Needs Annuity, if you and your attorneys are that way inclined. Not only are the rates even "better" still than for a still compos mentis 75 year old, but they're far more tax-efficient than pension annuities. They reduce the value of the estate and the entire annuity is paid to the care home tax free (unlike purchase life annuities where part of the annuity is deemed to represent return on investment and is taxable as income). Meanwhile your pension fund can continue to grow free of tax.

If you have expensive care needs that create a serious threat of exhausting your capital, the last thing you want is to have already spent your resources on an annuity that didn't take into account those needs during underwriting.

1. I have no idea what annuity rates will be when I am 75. Decision to buy an annuity at age 75 is independent of rates. 

2. There is no inheritance tax here. I will be buying an annuity from the part of my assets which are subject to income tax on withdrawal from a pension wrapper, including a massive tax bill in the year when its inherited.

3. I already have decades of experience of managing my own investments. Hasn’t impacted the decision. 

4, Advisors are to advise, not to “manage”.  I would only ever buy advice on specific one-off issues. 

5. The issue is that as we get older, our money management mental capacities decline. Older people statistically make wrong money decisions a lot more often. You may not be officially/legally senile, but still a lot less than 100%. 

6. If I live to 75 then I will need a longevity insurance that is annuity.