Timing an annuity purchase

sgx2000

Interesting thread...

I wonder at what % it would be better to take an annuity, compared to the average over, lets say, the last 30 years...

And more important, at what % would it be better,if indexed linked and a percentage still payable to your wife upon your death...

OldScientist

Albermarle said:

There are ( and will be more) a growing number of  positive comments about taking an annuity in various threads.
When a theoretical safe drawdown rate is < 4%, improving annuity rates start to look more attractive.
The downside is of course with a drawdown there is still a good chance there will be big chunk of it left to pass on when you die.

Provided the annuity rate is greater than the proposed drawdown rate and the whole portfolio is not used to purchase an annuity, then withdrawals on the remaining part of the portfolio will be proportionately less and therefore will leave a larger proportion of the remaining as legacy.

For example, according to https://www.hl.co.uk/retirement/annuities/best-buy-rates, currently a single life RPI at 65 provides an income of about 3.7% of premium. If your target withdrawal rate was 3.3% (SAFEMAX for UK with 50/50 global portfolio, see https://www.advisorperspectives.com/articles/2014/03/04/does-international-diversification-improve-safe-withdrawal-rates) then using 50% of the portfolio to purchase an annuity would provide the required total income as follows

Annuity 1.85%
Portfolio 1.45% (which is a withdrawal rate of 2.9% of the remaining half of the portfolio).

This then provides the same overall inflation-adjusted income (i.e. 3.3%) and is more robust against premature portfolio exhaustion should future market conditions be worse than historical ones. While it is clear that the available legacy early on in the retirement will be less (up to 50% less) how much legacy is left towards the end of retirement requires more detailed modelling (according to Pfau's book, Safety-First retirement planning, for a retirement at 65, the crossover appears to lie somewhere between the ages of 85 and 90, albeit for US markets and nominal annuities).

An alternative, is to retain the portfolio withdrawals at the full rate (i.e., 3.3%) and use the difference in actual income (3.5%) and required income (3.3%), i.e. 20 basis points, to provide a 'living legacy'.

The income from a single annuity with a 10 year guarantee period will be a little less (perhaps a few 10s of basis points at 65) or the income from a joint annuity somewhat less and therefore make this approach less attractive.

biscan25

Not knowing the individual annuity market well (but well understanding bulk annuity market), is there a lag between market yields and annuity rates? Like with individual mortgages where it tends to be about a week?
If so I suspect these might improve moving into next week.

Albermarle

sgx2000 said:

Interesting thread...

I wonder at what % it would be better to take an annuity, compared to the average over, lets say, the last 30 years...

And more important, at what % would it be better,if indexed linked and a percentage still payable to your wife upon your death...

I think that is quite difficult to answer as there are so many variations you can have with an annuity. For example I think regarding inflation, you can have one that does not increase with inflation or one that increases up to a max capped %, or one that just goes up say 3% pa regardless of the actual inflation rate or one that increases fully with inflation. I think the latter tend to be prohibitively expensive .

Linton

bostonerimus said:

dunstonh said:

Sorry dunstonh what do you mean, all of it taxable or tax free?

You only use the 75% part (taxable bit) to buy the annuity.  You don't use the 25% (tax free).

So, if there is any 25% left, you would take that and use the remaining 75% bit to buy the annuity.

I am in drawdown and currently have a third uncrystallised, two thirds crystallised and taxable and wonder how this would apply to both elements.

you would crystallise the remaining amount and take the 25% due.  Then purchase an annuity with the rest.

Just interested...if you took the 25% tax free amount and put it into an ISA could you then buy an annuity inside the ISA and get tax free income?

No you cant put an annuity into an ISA.  To buy an annuity from money in an ISA you take the money out as cash and pay for the annuity.  The annuity will attract less tax than one purchased with pension money since much of the payout will be regarded as return of your own money.  But of course to get the money into the ISA you would have used assets that at some stage were taxable income.

NannaH

The worrying thing for me about annuities is the issue around care needs in old age.
Say you spend £250k on an annuity then after a couple of years you need long term care,  the income won’t cover things when faced with £1k a week fees,  even if rates go up to 8% you would only have £30k income (including SP)  then it would be taxed too,   you would have to find £25k+ to top up, which would mean a charge on your property if you are single/widowed.  

Even with drawdown things are not straightforward. 

With an aging population there needs to be a change in how care fees are handled -  it’s obscene to have to pay tax if you are able to fund your own care when you have no option but to take out huge chunks of income to pay the fees.  

NedS

NannaH said:

The worrying thing for me about annuities is the issue around care needs in old age.
Say you spend £250k on an annuity then after a couple of years you need long term care,  the income won’t cover things when faced with £1k a week fees,  even if rates go up to 8% you would only have £30k income (including SP)  then it would be taxed too,   you would have to find £25k+ to top up, which would mean a charge on your property if you are single/widowed.  

I'm planning on using my pension to fund income needs, and my house to fund care needs (after all, I won't need it if I'm in a care home). The percentage of people requiring residential care is relatively low, and the costs are so high I'm struggling to understand how most people can ever budget for them. If I were forced to save and factor potential care costs into my retirement planning, I would never be able to afford to retire. I recently costed care home costs for my parents, at £3,500/week for both of them, and neither of them requires any medical care, mostly just social care. Assuming a 3 year stay in a care home, they are looking at £273k each, and that's before any potential deterioration and increase in the level of care required. And none of that falls under the Governments proposed cap as it's deemed as social care and housing costs.

NannaH said:

Even with drawdown things are not straightforward. 

With an aging population there needs to be a change in how care fees are handled -  it’s obscene to have to pay tax if you are able to fund your own care when you have no option but to take out huge chunks of income to pay the fees.  

Any monies in a pension are disregarded for means-tested care costs - there would be an assumed income, as if you had purchased an annuity, but no requirement to withdraw large amounts of money annually, paying large amounts of tax. But I get your point - you may not want a council-funded care home and may prefer to pay upmarket prices. Perhaps the government could consider tax relief for monies withdrawn from a pension to cover care home bills that exceed the basic rate tax allowance (one for the Treasury inbox)

NannaH

There needs to be something,  perhaps a time limited care needs annuity so you can buy one/two years at a time so it bypasses taxation.  Most care home stays are around 2 years I think,  although dementia care can ironically go on much longer. A neighbour’s wife lasted 8 years in a home with severe dementia and it cost him £1200 a week.  

LHW99

NannaH said:

There needs to be something,  perhaps a time limited care needs annuity so you can buy one/two years at a time so it bypasses taxation.  Most care home stays are around 2 years I think,  although dementia care can ironically go on much longer. A neighbour’s wife lasted 8 years in a home with severe dementia and it cost him £1200 a week.  

That's when an immediate care needs annuity looks good value!

dunstonh

Did an annuity quote today for a single life 66 year old with value protect (return of unpaid capital on death).  3.8% for RPI and 6.3% for level.