Annuities

coyrls

JoeCrystal said:

Kim1965 said:

So once the annuity has been taken out, the income from that point is not affected by market volitilty etc?
 I can see why the simplicity of an annuity would appeal to the financially inept.
So do annuity rates tend to follow inflation? Do we ever get decent annuity rates at times of low inflation? 

The only problem I am finding is that getting an index-linked annuity is very expensive at the moment,

And that is quite a big problem.

westv

Thrugelmir said:

westv said:

Moonwolf said:

I still like the idea of using an annuity with part of my pot to set a guaranteed minimum income level, free of volatility. What is left is to pay for the cream in my coffee.

The problem with that idea at the moment though is that you need a large amount to achieve a small amount of index linked annuity so the cream in your coffee might need to be watered down a bit.

That view has been created through the lens of recent stock market performance. The reasons behind which are well documented now. 

No, it's been created through the view of low annuity rates. If you are going to use part of a pot for guaranteed index linked income you are either going to need a large pot or be content that there won't be much left for cream.

DT2001

coyrls said:

JoeCrystal said:

Kim1965 said:

So once the annuity has been taken out, the income from that point is not affected by market volitilty etc?
 I can see why the simplicity of an annuity would appeal to the financially inept.
So do annuity rates tend to follow inflation? Do we ever get decent annuity rates at times of low inflation? 

The only problem I am finding is that getting an index-linked annuity is very expensive at the moment,

And that is quite a big problem.

Maybe however if you think the stock market will fall it could be seen as better value as you know your are guaranteed some income. 

If you retire early you could use Mordko’s suggestion on another thread to take a level annuity for a fixed period to take you to or beyond SPA/DB drawdown. This then has a place in your overall plan.

DT2001

westv said:

Moonwolf said:

I still like the idea of using an annuity with part of my pot to set a guaranteed minimum income level, free of volatility. What is left is to pay for the cream in my coffee.

The problem with that idea at the moment though is that you need a large amount to achieve a small amount of index linked annuity so the cream in your coffee might need to be watered down a bit.

Yes. You are swapping peace of mind for potentially higher rates of income however you might argue that if you have some guaranteed income you can be more aggressive with the funds left.

Moonwolf

westv said:

Moonwolf said:

I still like the idea of using an annuity with part of my pot to set a guaranteed minimum income level, free of volatility. What is left is to pay for the cream in my coffee.

The problem with that idea at the moment though is that you need a large amount to achieve a small amount of index linked annuity so the cream in your coffee might need to be watered down a bit.

In my case I have three DB pensions and full state pension from 67.  When I retire I intend to use my DC pot as a bridge to 67, around then I'll look at what is left but I could see myself getting an annuity to set a guaranteed minimum figure.  My happy path* has me with £200K left at 70, drawing down a minimum of £4K but ideally £10K a year.  With my health, putting half that into an annuity at 70 gets me near my minimum and 10-20 years at the higher figure.  Relying just on drawdown might give me more but a market correction could leave me with difficult choices and the smaller the principle left the riskier it is.

*Projections are nothing to £300K and they might be wrong. All figures are before inflation.

Moonwolf

Albermarle said:

Moonwolf said:

I'm not sure why that is financially inept.

Nor sure why you make the comment in bold ? 
Annuities are still suitable for some people/situations . The problem is that recently they have been very expensive, so drawdown has been much more favoured . However it seems that annuities are likely to become less expensive in future.

Just it was suggested elsewhere in the thread.  I'm not sure I'd put everything in an annuity but I quite like the idea of not having to worry about running out, I think that has a concrete value for me. Not just the annuity but being able to spend 100% of the rest of the pot. There is also a scenario for me where crystallizing in my early 70s might avoid LTA issues and this is one way to do that.

Thrugelmir

westv said:

Thrugelmir said:

westv said:

Moonwolf said:

I still like the idea of using an annuity with part of my pot to set a guaranteed minimum income level, free of volatility. What is left is to pay for the cream in my coffee.

The problem with that idea at the moment though is that you need a large amount to achieve a small amount of index linked annuity so the cream in your coffee might need to be watered down a bit.

That view has been created through the lens of recent stock market performance. The reasons behind which are well documented now. 

No, it's been created through the view of low annuity rates. 

Both are correlated events. Things don't just happen there's always an underlying cause. 

DT2001

Albermarle said:

Kim1965 said:

So once the annuity has been taken out, the income from that point is not affected by market volitilty etc?
 I can see why the simplicity of an annuity would appeal to the financially inept.
So do annuity rates tend to follow inflation? Do we ever get decent annuity rates at times of low inflation? 

The downside of course is that when you die the annuity dies with you ( unless you have a 50% spouse element , then it dies when they die ) .
With a well managed drawdown ( and a bit of luck) there may well still be a large pot left for your heirs when you die.

Of course the two are not mutually exclusive and you can have both at the same time .

Picking up on a number of points raised by different forumites I can see at least one role for an annuity. If you had a pot of £1m and used an SWR of 3.2% you’d take an income of £32k p.a. alternatively you could take a fixed term annuity until SPA to cover that amount. I looked at 5 year annuity from 62 and found a quote for £9,500 p.a. for £135k with the return of a £100k at the end of the 5 years. Your residual pot £1m - £135k would for those 5 years need to produce 2.6%. So, I think, an annuity in these circumstances would help protect against a poor sequence of returns whilst not ‘losing’ your capital from your inheritance pot. 

TELLIT01

Albermarle said:

TELLIT01 said:

On a small pension pot couldn't the admin costs of drawdowns outweigh the benefits of the flexibility?

With wrong provider and the wrong funds , the costs could be significant .
However it is possible to have a cost  of around 0.5% to 0.6% all in , even for a small pension pot. 

The reason I ask is that my wife had been with her current employer a comparatively short time and the pot from that employer is under £30k.  She already receives income from two other pensions.  Looking at options and info from Age Partnership, as an example, shows minimum charge of £1500 in setup costs for a drawdown.

Notepad_Phil

TELLIT01 said:

Albermarle said:

TELLIT01 said:

On a small pension pot couldn't the admin costs of drawdowns outweigh the benefits of the flexibility?

With wrong provider and the wrong funds , the costs could be significant .
However it is possible to have a cost  of around 0.5% to 0.6% all in , even for a small pension pot. 

The reason I ask is that my wife had been with her current employer a comparatively short time and the pot from that employer is under £30k.  She already receives income from two other pensions.  Looking at options and info from Age Partnership, as an example, shows minimum charge of £1500 in setup costs for a drawdown.

In that case she might be able to transfer this pension into one of these already existing pensions. If she's not able to do that, then there are plenty of DIY options available that can have costs in the range of Albamarle's quote e.g. Hargreaves Lansdown, Youinvest, Fidelity for a start. And don't forget to check the costs of whoever her pension is currently with.

P.s. do you have a link to that Age Partnership info, as £1500 as a minimum sounds ridiculous.