Annuity or...

Langtang

Just looking at my most recent pension review letter from ReAssure, and wondered if I was missing something?

On the 1st page it says that at age 60 (58 now) I could get a guaranteed income for life of £6,380.  It then gives figures in 5 year intervals of £8.3k, £10.8k, £14.5k and £20.1k. All well and good. There’s the usual no promises, no guarantees, trust me, I’m a doctor type statements. 

The current value is sitting at £154k (a drop of £5k in the year ‘19 to ‘ 20). Using my fag packet calculations, the annuity would seem higher than the drawdown (is that the correct term?) figure would be. I’m getting a figure of £6,162.  I’m not sure if I am working it out correctly. My understanding was that annuities weren’t the best value for money these days. 

It seems to be invested in “choices unitised with-profits long term pension accumulator series 01” phew. I say seems to be, it is invested there. 

Marcon

Is the guaranteed income for life based on being for your own life only (i.e. no spouse) and a 'level' annuity (no increases in payment)?

There's no specific drawdown rate; it'll be whatever you choose to make it. 'Safe withdrawal rates' of 4% (or indeed 3%) are at best guesses. Don't forget that if you are drawing down at a % of your pot each year, next year's drawdown could be a higher or lower amount of cash, depending on how the pot performs from one drawdown to the next.

Thrugelmir

Level annuity will fall in value with inflation. 

Any option which provides annual increases, eg index linked, will start at a much lower level of income. 

dunstonh

On the 1st page it says that at age 60 (58 now) I could get a guaranteed income for life of £6,380.  It then gives figures in 5 year intervals of £8.3k, £10.8k, £14.5k and £20.1k. All well and good. There’s the usual no promises, no guarantees, trust me, I’m a doctor type statements. 

That is because you dont know what the value is going to be tomorrow, let alone next week, next month, next year etc.  Projections use a range of assumptions.  Not real figures but synethic.  They also display them after a deduction of 2% a year (current figure) to give a today spending power feel.

 Using my fag packet calculations, the annuity would seem higher than the drawdown (is that the correct term?) figure would be. I’m getting a figure of £6,162.  I’m not sure if I am working it out correctly. My understanding was that annuities weren’t the best value for money these days. 

Drawdown gives you a choice of what you draw.  If you draw the same figure as the annuity then it will be the same. If you draw less, then it will be less.

The annuity figure will be synthetic too and may not reflect how you would prefer to receive it or the market rates.

Langtang

Marcon said:

Is the guaranteed income for life based on being for your own life only (i.e. no spouse) and a 'level' annuity (no increases in payment)?

I’ve scoured the review, and found no mention of either of those questions. Any idea where I could get that info? Would it be in the initial blurb I got when I enrolled?

dunstonh said:

On the 1st page it says that at age 60 (58 now) I could get a guaranteed income for life of £6,380.  It then gives figures in 5 year intervals of £8.3k, £10.8k, £14.5k and £20.1k. All well and good. There’s the usual no promises, no guarantees, trust me, I’m a doctor type statements. 

That is because you dont know what the value is going to be tomorrow, let alone next week, next month, next year etc.  Projections use a range of assumptions.  Not real figures but synethic. 

Thanks for your insight. I only gave the figures for reference. Fully appreciate that figures will fluctuate. 

dunstonh said:

 Using my fag packet calculations, the annuity would seem higher than the drawdown (is that the correct term?) figure would be. I’m getting a figure of £6,162.  I’m not sure if I am working it out correctly. My understanding was that annuities weren’t the best value for money these days. 

Drawdown gives you a choice of what you draw.  If you draw the same figure as the annuity then it will be the same. If you draw less, then it will be less.

The annuity figure will be synthetic too and may not reflect how you would prefer to receive it or the market rates.

Although we don’t know how the fund will perform, can I use a safe withdrawal % to get a ballpark figure as to whether the annuity is better than the drawdown. Is my rough calculation in line with what you would expect to “safely” drawdown from a fund that size? Again, I appreciate that you can drawdown as little or as much as you wish and that in turn makes the fund last a longer or shorter period. 

dunstonh

I’ve scoured the review, and found no mention of either of those questions. Any idea where I could get that info? Would it be in the initial blurb I got when I enrolled?

The assumptions used in projections are usually shown in the small print.

Although we don’t know how the fund will perform, can I use a safe withdrawal % to get a ballpark figure as to whether the annuity is better than the drawdown. 

You can use reasonable assumptions in your calculations based on your risk level and assets used.   You wont be right but you may not be too far wrong

Is my rough calculation in line with what you would expect to “safely” drawdown from a fund that size?

If depends on your asset mix.   The less investment risk you take, the lower your expected sustainable draw rate should be.  The last decade has been very good for low risk asset classes other than cash.   I fear that it has given cautious and medium risk investors false security of what they will get in future.

michaels

Marcon said:

Is the guaranteed income for life based on being for your own life only (i.e. no spouse) and a 'level' annuity (no increases in payment)?

There's no specific drawdown rate; it'll be whatever you choose to make it. 'Safe withdrawal rates' of 4% (or indeed 3%) are at best guesses. Don't forget that if you are drawing down at a % of your pot each year, next year's drawdown could be a higher or lower amount of cash, depending on how the pot performs from one drawdown to the next.

Normally when you are doing SWR calcs you assume you will take the same amount (index linked) each year, it will fluctuate in terms of what proportion of the remaining pot it represents.

jamesd

Assuming 1.5% in costs two drawdown methods provide these safe withdrawal rates:

3.2% of initial pot, increasing with uncapped inflation on a thirty year plan. Variously called 4% rule or constant inflation-adjusted income. This starts at worst case and can usually be increased over time.

5.0% of initial pot initially, usually increasing with inflation but skipping increases, decreasing or increasing more depending on the investing conditions you actually live through. Guyton-Klinger rules.

Both offer 100% spousal pension and an inheritance pot if you die before the end of the plan, or if you live through even average times or better. Inflation increases are usually better than defined benefit, which typically have a 5% cap.

About safe withdrawal rates:

1. A safe withdrawal rate is normally based on starting capital and doesn't go up and down every year with the pot size each year. The specific rules say how it changes.

2. Safe withdrawal rates aren't arbitrary. The commonly used ones consider every starting year in the last hundred plus years and work out what the maximum starting percentage was that wouldn't have run out of money if the proposed rules and investments are used. The lowest of those is the safe withdrawal rate. So the SWR is at least safe against the worst case seen in those hundred plus years.

Asset mixes I used are the normal 50:50 equity:bonds for 4% rule and 65:35 for Guyton-Klinger. As long as you use at least fifty percent equities the rates don't change hugely with large cap equity to bond split. Adding a significant chunk of small cap equity can increase 4% rule by 0.5.

sandsy

£6,162 seems to be 4% of £154k. So it seems you've tried to apply a so-called 'safe withdrawal rate' although you've applied it to the fund value now, at age 58. 4% is quite a high withdrawal rate for an inflation linked income from either 58 or 60. A safe withdrawal rate runs down the fund over a specified period of time so the longer you spend in retirement, the lower the withdrawal rate needs to be.

JohnWinder

To annuitise or not? It's a great can of worms that perplexes the geniuses, but why not have a go....

You seem to be asking 'which will give me more income?'. Commonly, folk ask 'which should I choose?'. That latter is hard, but easier than your question. Yours is ?impossible because your health and longevity are future unknowns.

Secondly, you really need to tell us if the annuity is CPI indexed, and preferably how much you need as income from these investments. The three retirement income risks are market risk, inflation, and longevity.

A basis for choosing is how much income you need from your portfolio. If you need less than is sustainable (3.5% is sustainable in this example), let’s say 3.4% in the first year, and that £ amount rises with inflation subsequently, then your funds will, by definition last your lifetime, making this the best choice. No annuity.

Theoretically, the annuity rate they can offer ought to be higher than this, because the insurance company can invest just as safely as you would have for your SWR of 3.5%, plus they have the benefit of longevity pooling (some will die early allowing the rest to get their money). Of course, company profit and inefficiency in business processes reduce what the annuitants can get. I calculate they are offering you about 4% as an annuity.

If your retirement needs are >4%/year, in this example, you’re in trouble whatever you do because the annuity is inadequate and the 'SWR' approach probably runs out of money too early (it might not of course, if you have a good sequence of returns). If your needs are 3.4%/year, don’t annuitise (folk still do; why, below). If your income needs are between 3.5% and 4%/year, you have sufficient money and you should export the risk by annuitising.

Why annuities if you don’t need to? You might sleep better at night. Partial annuitisation is always an option.

Langtang

JohnWinder said:

...you really need to tell us if the annuity is CPI indexed, and preferably how much you need as income from these investments. The three retirement income risks are market risk, inflation, and longevity.

Wow, thanks for the great reply and for taking the time. Excuse me if I appear not to understand things properly (probably because I don’t)

I’m not sure about the answer to either of those questions. In the assumptions of the review it says a few things.
1. “We’ve adjusted your illustrations to take yearly inflation of 2.5% into account so you have an idea of how much retirement income you would get in today’s money”
2. “We’ve assumed the amount of retirement income you receive remains the same for the rest of your life”
3. “There are other options available to you if you were to take an annuity, such as inflation proofing your income.... or providing an income to a beneficiary if you were to die before them”

I’m not sure what 1 means, the 2nd one to me is saying the income will be the same every year, so not cpi indexed. No 3 confirms that there is an option to index link it, at a cost. Also as @Marcon asked, does it provide an income for a spouse? Yes it can. At a cost. 

With regard to how much I need from this investment, I’m not really sure. The short answer is, this comes nowhere near what we need to survive when combined with my wife’s pension.  We have an inheritance in the process of being finalised, and would use that to make up the shortfall between what we spend and what we get in retirement income- up until state pension kicks in. Obviously the more I get from this, the less we need to use from the inheritance (although we have no dependants, so nothing will be left in a will apart from small bequests)

Why annuities if you don’t need to? You might sleep better at night. Partial annuitisation is always an option.

Simply because I’d worked out (perhaps incorrectly) that it was better value than safely drawing down.

Of course I realise that if I were to die 10 years in without triggering the “option” of spousal pension, the pot would die with much money left in. Whereas if I drawdown and the same happens, my wife would benefit from the balance. 

dunstonh said:

I’ve scoured the review, and found no mention of either of those questions. Any idea where I could get that info? Would it be in the initial blurb I got when I enrolled?

The assumptions used in projections are usually shown in the small print.

Found it, thank you. 

Is my rough calculation in line with what you would expect to “safely” drawdown from a fund that size?

If depends on your asset mix.   The less investment risk you take, the lower your expected sustainable draw rate should be.  The last decade has been very good for low risk asset classes other than cash.   I fear that it has given cautious and medium risk investors false security of what they will get in future.

How do I find out about my asset mix? Would it simply be a case of contacting ReAssure? How can I influence/alter that risk? By switching to a different provider, or fund?

jamesd said:

Assuming 1.5% in costs two drawdown methods provide these safe withdrawal rates:

3.2% of initial pot, increasing with uncapped inflation on a thirty year plan. Variously called 4% rule or constant inflation-adjusted income. This starts at worst case and can usually be increased over time.

5.0% of initial pot initially, usually increasing with inflation but skipping increases, decreasing or increasing more depending on the investing conditions you actually live through. Guyton-Klinger rules.

Both offer 100% spousal pension and an inheritance pot if you die before the end of the plan, or if you live through even average times or better. Inflation increases are usually better than defined benefit, which typically have a 5% cap.

Wow, thanks for that. I hate to say that a lot of that was waaay over my head, especially since you went to so much trouble. When you speak of 3.2% etc. are you talking about my plan specifically, or is this just “the method”? You say both offer spousal pension and inheritance pot. Again , my pension specifically or the method. As mentioned by me somewhere in this post, spousal pension is an option, at a cost of lower annuity. 

My apologies to all if I’m either being thick, or misinterpreting things.