Annuity Rates don't make sense - am I missing something?

DE_612183

So I go onto the Moneyhelper.org website - I key in a pop of 100k, say I'll retire @63 no protection and it gives me a monthly income of £217 or £2610 per year - therefore assuming that I'll live a further 38+ years - ie pop my clogs at 101.
I've even added in high blood pressure as an illness.
Is this right?

MallyGirl

did you opt for joint cover or rising with inflation?

DE_612183

not joint and increase via rpi

zagfles

Dave46049 said:

So I go onto the Moneyhelper.org website - I key in a pop of 100k, say I'll retire @63 no protection and it gives me a monthly income of £217 or £2610 per year - therefore assuming that I'll live a further 38+ years - ie pop my clogs at 101.
I've even added in high blood pressure as an illness.
Is this right?

You must have selected an index linked/increasing annuity, not a level one? The reason is that gilt yields are lower than inflation. Index linked gilts have negative yields. Just like interest rates are below inflation. Safe investments aren't keeping up with inflation at the moment, they haven't for years but it's even worse now.

draiggoch

These are the example rates on Hargreaves Lansdown at the moment.(obviously generic information used)
Your quote seems a little low if it has no joint life or escalation.

Annual annuity income from a £100,000 pension

	Age 55	Age 60	Age 65	Age 65 (smoker*)	Age 70	Age 75
Single life, level, no guarantee	£4,404	£4,832	£5,584	£6,405	£6,367	£7,575
Single life, level, 5 year guarantee	£4,400	£4,823	£5,566	£6,353	£6,336	£7,442
Single life, RPI, 5 year guarantee	£1,808	£2,224	£2,923	£3,632	£3,743	£5,047
Single life, 3% escalation, 5 year guarantee	£2,664	£3,098	£3,835	£4,559	£4,612	£5,799
Joint life 50%, level, no guarantee	£4,111	£4,498	£5,084	£5,650	£5,775	£6,697
Joint life 50%, 3% escalation, no guarantee	£2,394	£2,792	£3,372	£3,890	£4,067	£4,992

JoeCrystal

Well, that sounds about right then. Have a look at the annuity rates on the HL site for example.

https://www.hl.co.uk/retirement/annuities/best-buy-rates

dunstonh

Dave46049 said:

So I go onto the Moneyhelper.org website - I key in a pop of 100k, say I'll retire @63 no protection and it gives me a monthly income of £217 or £2610 per year - therefore assuming that I'll live a further 38+ years - ie pop my clogs at 101.
I've even added in high blood pressure as an illness.
Is this right?

That rate suggests you have included indextation and possibly significant death benefits (e.g. 20 or 30 years or value protect).

Your calculation of 38 years seems to suggest you are ignoring the indexation (your second post says you selected RPI which you have not factored in)

Albermarle

Dave46049 said:

So I go onto the Moneyhelper.org website - I key in a pop of 100k, say I'll retire @63 no protection and it gives me a monthly income of £217 or £2610 per year - therefore assuming that I'll live a further 38+ years - ie pop my clogs at 101.
I've even added in high blood pressure as an illness.
Is this right?

As above , with an inflation linked annuity by the time you reach 101 , your annual pension would probably be in the range of £6K to £7K 

sandsy

When you've calculated that you'd need to live for 38 years to break even, you've ignored the fact that the income from the RPI annuity will go up each year. 

At the moment RPI is 9%. So someone who took an annuity paying £2610 last year, would see it increase to £2845 this year, etc etc. Obviously, no-one can tell you what inflation will be for definite over the next few years so it's not possible to work a a definite break-even period.

Malthusian

Inflation-linked annuities still have a very late break-even period (your 80s or 90s) in terms of when you are better off in terms of total income received; unless inflation is consistently much higher than the 2-2.5% which remains the Bank of England's target.

Remember that you're not just waiting for the lower index-linked annuity to overtake the level annuity, you then have to wait for the extra income to make up for all the income you haven't received due to taking the lower index-linked annuity. This typically takes until your 80s or 90s unless you assume sky-high inflation.

Unless you are buying an annuity with an unusually large DC fund, the index-linking of the State Pension (and any defined benefit pensions) means you have more to lose from the difference between a level and index-linked annuity than you have to gain from successfully playing Cassandra and watching your annuity rocket up in the next decade or two, if inflation at 10%pa is a "noo nermal".

Nobody knows what inflation will be in the long term but we do know there isn't going to be a once-every-hundred-years pandemic and an invasion of democratic Europe every single year.

zagfles

Malthusian said:

Inflation-linked annuities still have a very late break-even period (your 80s or 90s) in terms of when you are better off in terms of total income received; unless inflation is consistently much higher than the 2-2.5% which remains the Bank of England's target.

Remember that you're not just waiting for the lower index-linked annuity to overtake the level annuity, you then have to wait for the extra income to make up for all the income you haven't received due to taking the lower index-linked annuity. This typically takes until your 80s or 90s unless you assume sky-high inflation.

Unless you are buying an annuity with an unusually large DC fund, the index-linking of the State Pension (and any defined benefit pensions) means you have more to lose from the difference between a level and index-linked annuity than you have to gain from successfully playing Cassandra and watching your annuity rocket up in the next decade or two, if inflation at 10%pa is a "noo nermal".

Nobody knows what inflation will be in the long term but we do know there isn't going to be a once-every-hundred-years pandemic and an invasion of democratic Europe every single year.

Most DB pensions have a cap on inflation increases, certainly in the private sector.

If you're risk adverse enough to buy an annuity, you're unlikely to want to risk inflation wiping out most of your income. Things will keep happening, maybe not war, maybe not pandemics, but something. What caused prices to rise 250% in the 1970s? A £10k level annuity in 1970 would have been worth under £3000 10 years later.