Should I buy an annuity now or wait?

dunstonh

I'll get some more quotes with different guarantees/spousal payment. The people who did this initial sweep for me are called "The Retirement Room", it was a Scottish Widows annnuity that came out top.

I haven't heard of them. Typically IFAs get the best rates as long as the fund value is above around 25k.   (below £25k online sites are often better but for larger values, IFA charges tend to be less than online site commissions).

Did they get you to complete a medical questionnaire or are they just doing generic quotes?
Have they gone through your scenario to eliminate the unsuitable annuity options or are they just order taking from you?

JohnWinder

I guess you’re talking about an immediate (payments start at purchase time) lifetime (it lasts until a nominated person dies) annuity. But what is guaranteed for six years?

Retirement investing carries three risks: market risk (your investments collapse and don’t recover in time); longevity (you outlive your money); and inflation. You can export those risks to an insurance company, but unless you buy an inflation linked annuity you are left with that risk. I can see the attraction of not managing your retirement investments, but inflation damage might be a high price particularly for a younger person.

OldScientist

higgle said:

I'm retiring at the end of August with a pension pot which will be £140k, maybe a little more. I'll take the £35k lump sum and invest rest in a way i have not yet made a final decision on. I have a state pension of £10,900 and with my husband's pension we will have a total income of just under £50k gross if I allocate anticipated income from the £100k. My husband is till working part time so we have another £19k from that. I do not want to spend my retirement managing or worrying about the income from the £100k so I'm thinking of buying an annuity. The best quote I have had so far is just over £6k which is guaranteed for 10 years and with 50% to my husband if I die first.We own our house free of mortgage and have some other savings so I'm not worried about keeping any of this particular fund back for my children. At the moment I'm thinking of holding back until the next Bank of England interest rate review just to see if I can get a bit more. This seems to make sense to me, especially as the payment will enable me to save a little and thereby save to do a DiY inflation increase out of the savings. As the general view is still anti annuity it would be good to get some opinions on this. My husband has always been public sector - they have it so much easier on the pensions front!

In favour of delaying annuity purchase:
1) If the BoE raise interest rates then annuity rates (at some stage) will follow (a 1% increase in interest rates leads, very roughly, to a 0.6% increase in annuity rates).
2) You'll be a little older and the annuity rate may go up a tiny amount because of this.

Against delay:
1) Depending on what your pension pot is currently invested in, it could fall in value while waiting.

Judging by the quote you've had, I'm guessing that it is for a level annuity. These give higher income to start with but the value is eroded by inflation (e.g. assuming the BoE/government manage to get inflation back under control sooner than later, even 10 years of 3% inflation will reduce the spending power from a level annuity by 25%, while 20 years will reduce it by just under 50%). It might be worth getting quotes for an RPI-linked annuity or one with a 3% escalation (with the downside being that their initial payouts will be much lower - roughly 2 percentage points lower).

westv

OldScientist said:

higgle said:

I'm retiring at the end of August with a pension pot which will be £140k, maybe a little more. I'll take the £35k lump sum and invest rest in a way i have not yet made a final decision on. I have a state pension of £10,900 and with my husband's pension we will have a total income of just under £50k gross if I allocate anticipated income from the £100k. My husband is till working part time so we have another £19k from that. I do not want to spend my retirement managing or worrying about the income from the £100k so I'm thinking of buying an annuity. The best quote I have had so far is just over £6k which is guaranteed for 10 years and with 50% to my husband if I die first.We own our house free of mortgage and have some other savings so I'm not worried about keeping any of this particular fund back for my children. At the moment I'm thinking of holding back until the next Bank of England interest rate review just to see if I can get a bit more. This seems to make sense to me, especially as the payment will enable me to save a little and thereby save to do a DiY inflation increase out of the savings. As the general view is still anti annuity it would be good to get some opinions on this. My husband has always been public sector - they have it so much easier on the pensions front!

In favour of delaying annuity purchase:
1) If the BoE raise interest rates then annuity rates (at some stage) will follow (a 1% increase in interest rates leads, very roughly, to a 0.6% increase in annuity rates).
2) You'll be a little older and the annuity rate may go up a tiny amount because of this.

Against delay:
1) Depending on what your pension pot is currently invested in, it could fall in value while waiting.

Judging by the quote you've had, I'm guessing that it is for a level annuity. These give higher income to start with but the value is eroded by inflation (e.g. assuming the BoE/government manage to get inflation back under control sooner than later, even 10 years of 3% inflation will reduce the spending power from a level annuity by 25%, while 20 years will reduce it by just under 50%). It might be worth getting quotes for an RPI-linked annuity or one with a 3% escalation (with the downside being that their initial payouts will be much lower - roughly 2 percentage points lower).

I was looking at annuity rates the other day just for curiosity. Using the HL quote site I selected quotes based on me being 60 with a 100% survivor pension. The figure were £ 15,182 level or £6,539 RPI. At the 3% inflation figure you quote it would take me until 89 for the RPI income to exceed the level income and I would be 110 when the total income received via the RPI annuity exceeded the level annuity.
At 5% it would be 78 and 91.

higgle

Yes, westv, the escalating annuity rates didn't make much sense to me. I was planning on saving some of the payment I got each month, say £100, then after 5 years stopping saving it which would be equal to a tax free increase of 20% and then drawing down on those savings after another 5 years. It is  DiY way of inflation proofing. OldScientist, thank you for the figures about how inflation works, and the link between annuity calculations and inflation. More food for thought.

OldScientist

westv said:

OldScientist said:

higgle said:

I'm retiring at the end of August with a pension pot which will be £140k, maybe a little more. I'll take the £35k lump sum and invest rest in a way i have not yet made a final decision on. I have a state pension of £10,900 and with my husband's pension we will have a total income of just under £50k gross if I allocate anticipated income from the £100k. My husband is till working part time so we have another £19k from that. I do not want to spend my retirement managing or worrying about the income from the £100k so I'm thinking of buying an annuity. The best quote I have had so far is just over £6k which is guaranteed for 10 years and with 50% to my husband if I die first.We own our house free of mortgage and have some other savings so I'm not worried about keeping any of this particular fund back for my children. At the moment I'm thinking of holding back until the next Bank of England interest rate review just to see if I can get a bit more. This seems to make sense to me, especially as the payment will enable me to save a little and thereby save to do a DiY inflation increase out of the savings. As the general view is still anti annuity it would be good to get some opinions on this. My husband has always been public sector - they have it so much easier on the pensions front!

In favour of delaying annuity purchase:
1) If the BoE raise interest rates then annuity rates (at some stage) will follow (a 1% increase in interest rates leads, very roughly, to a 0.6% increase in annuity rates).
2) You'll be a little older and the annuity rate may go up a tiny amount because of this.

Against delay:
1) Depending on what your pension pot is currently invested in, it could fall in value while waiting.

Judging by the quote you've had, I'm guessing that it is for a level annuity. These give higher income to start with but the value is eroded by inflation (e.g. assuming the BoE/government manage to get inflation back under control sooner than later, even 10 years of 3% inflation will reduce the spending power from a level annuity by 25%, while 20 years will reduce it by just under 50%). It might be worth getting quotes for an RPI-linked annuity or one with a 3% escalation (with the downside being that their initial payouts will be much lower - roughly 2 percentage points lower).

I was looking at annuity rates the other day just for curiosity. Using the HL quote site I selected quotes based on me being 60 with a 100% survivor pension. The figure were £ 15,182 level or £6,539 RPI. At the 3% inflation figure you quote it would take me until 89 for the RPI income to exceed the level income and I would be 110 when the total income received via the RPI annuity exceeded the level annuity.
At 5% it would be 78 and 91.

It is certainly a difficult decision since no-one knows what inflation regime we are going to have (and therefore it is likely that we won't know what the best decision would have been for many years).

Historically (1872-2016, CPI data from https://www.macrohistory.net, my own calculations), the UK has had annualised CPI inflation (in %) at the 1st, 10th, 25th and 50th percentiles over periods of 10, 20, and 30 years of
                            
                                  1       10        25      50
10 years (1972)      13.1     8.5       5.3     2.8
20 years (1970)        9.1     8.5       5.0     3.2
30 years (1963)        7.5     7.1       5.6     3.1

In other words, what we are currently experiencing is not all that unusual (unless it lasts a decade or more) and annualised UK inflation has been over 5% in 25% of rolling 30 year periods (so your second calculation is not altogether unlikely). There is also a 'sequence of inflation risk', i.e. if all the very high inflation occurs at the beginning of retirement (the rather frightening 13% for 10 years starting in 1972) then the income from the level annuity would be worth about 25% in real-terms at the end of the 10 year period (i.e. the crossover in income between the level and RPI annuities would occur in about year 8 or so).

PennyForThem_2

Think as if your partner had died.  Do you have the money to fund the lifestyle you desire?  This lifestyle maynot be the one you wanted as a couple.

Also get your partner to infill you about any monetary/ pension he administers - get to understand it because maybe you will need to if s/he dies.

higgle

WE did our pre/post retirement budget over the weekend. It looks ok on all scenarios. If you take out all the pension contributions and add in husbands state pension, which we have saved up until now, we will have only a couple of hundred pounds to spend than we do now, which was a pleasant surprise. If he predeceased me I'd have an income of  £2k per month plus the savings so I'd be OK - I'd certainly downsize if that happened as I could not manage our present house on my own.