Should we Buy an Annuity Now?

Redlander

In view of annuity rates being near their highest for many years, I am wondering if it would be a good idea to buy an annuity now.

I am 67 and am taking my state pension and an occupational pension of £11,580. My wife is 66 and intends to defer her state pension and continue working for a few years yet; she is taking an occupational pension of £12,000.

We each have pension pots amounting to a total of about £200,000; she is still paying £240 per month into hers but I have stopped paying into mine.

We were thinking of leaving our pension pots alone until either she stops working or until one of us dies.

But we are wondering, in view of the high rates, whether it would be good to buy annuities now. If we defer them, the annuity income would benefit from us having fewer year to live, but lose because rates may well have fallen. How should we try to balance those two factors?

I was thinking that the annuities should be index-linked and after one of us dies to continue paying 100% to the survivor. This would give us an estimated income of £600 per month.

OldScientist

Redlander said:

In view of annuity rates being near their highest for many years, I am wondering if it would be a good idea to buy an annuity now.

I am 67 and am taking my state pension and an occupational pension of £11,580. My wife is 66 and intends to defer her state pension and continue working for a few years yet; she is taking an occupational pension of £12,000.

We each have pension pots amounting to a total of about £200,000; she is still paying £240 per month into hers but I have stopped paying into mine.

We were thinking of leaving our pension pots alone until either she stops working or until one of us dies.

But we are wondering, in view of the high rates, whether it would be good to buy annuities now. If we defer them, the annuity income would benefit from us having fewer year to live, but lose because rates may well have fallen. How should we try to balance those two factors?

I was thinking that the annuities should be index-linked and after one of us dies to continue paying 100% to the survivor. This would give us an estimated income of £600 per month.

I guess there are several questions:
1) Are your occupational pensions fully inflation protected or not? Do they have survivor benefits?
2) Do you have a legacy motive?
3) How much income do you need to cover your desired lifestyle (without annuities, your total pension income would appear to be about £21k+11.5k+£12k=£44.5k)?

In terms of deferring: Do you mean literally a deferred annuity (i.e., you buy one now that will pay out in the future) or that you would defer your decision to buy?

If the latter, then it is impossible to say how gilt yields will change, but currently a single life RPI payout rate is 4.4% at 65yo, while at the beginning of last year (when yields were still low) the rates were 2.7%, 3.6%, and 4.9% at 65, 70, and 75, respectively (although the payout rates will be different, the same thing will apply to joint annuities). In other words, if yields fall again, then you might end up with a similar payout rate at 75 as you would now (of course, yields might continue to go up). Furthermore, it is possible that the real value of your pension pots could fall over the next 5-10 years.

Redlander

Our occupational pensions are  inflation-protected. My wife's, I think partially. each one provides 50% for the survivor.
We don't have a legacy motive as far as our pension pots are concerned. We have other savings I'd like to pass on.
I don't have a particular desired lifestyle, but I'd appreciate a bit more than we're due now.

I was thinking of deferring *buying* the annuities

The situation you mention - getting no more buying at age 75 than we would get now - is exactly what I was thinking f when I posted this enquiry.

stuhse

Question is how much money you will need when your 75 ?   Mobility and ability to have fun spending money only decreases with age.  Look at the the lifestyles of the 75 and 80 year olds around you.   I'd take the money now give up work and enjoy life while you can.  

Whats the annuity you can buy ? roughly a 10k income with your 200k ?

So you have  index linked house hold income of roughly 54k available to you, when either partner dies the other would have 27k ish. Looks pretty good to me. .? What's your desire ?  You could boost your pension pots by paying one off payments of your maximum amounts this year from your savings to give you a bigger annuity. .?

As the rest of your pension portfolio is index linked, you might opt for a non index linked annuity giving you a higher return during the early years of your retirement...accepting its value will decrease as you age....but so will your requirement for money.

Or you could draw down on the 200k.   20k a year for ten years taking you to 77 giving 64k a year.

Or 15k year for ten years giving 59k a year...after that buy an annuity with what's left.   

Combinations are endless !

Secret2ndAccount

You have 2 x DB and 2 x SP, totalling > 45k per year index linked. You should keep the 200k and not commit it to an annuity. You might need a lump sum at some point, so you don't want all your money tied up in annual income. Decide how and when you might want to spend it, then that leads to a decision as to how you invest it. If you decide to spend heavily in the first few years of retirement, keep the 200k in a money-market fund paying >4%. If you want to spread it gradually over your lifetime, or not take it out any time soon, then it would be better to invest some of it in an equity fund which could very possibly beat inflation.

ukdw

I tried to buy a partial annuity last year - age 58 single life 30 year protected for a return of 6.3%.  

I did consider getting index linked, but the rate was about half - so decided it would probably be a long time before inflation had increased prices by 100% in order to make us worse off, plus having many years of larger payments would in my mind offset the eventual loss,

I did consider getting joint 50% or Joint 100% - but we decided a 30 year guarantee would be ok for us instead, plus it would also mean the children would get an income for a few years if we both die at or before average ages.

In the end I wasn't able to complete the purchase due to my drawdown pension provider not allowing partial annuity purchases - but am working on a solution to this issue (via a full transfer to a better drawdown provider) so that I am ready when/if annuity rates increase again in the future.

OldScientist

Redlander said:

Our occupational pensions are  inflation-protected. My wife's, I think partially. each one provides 50% for the survivor.
We don't have a legacy motive as far as our pension pots are concerned. We have other savings I'd like to pass on.
I don't have a particular desired lifestyle, but I'd appreciate a bit more than we're due now.

I was thinking of deferring *buying* the annuities

The situation you mention - getting no more buying at age 75 than we would get now - is exactly what I was thinking f when I posted this enquiry.

I'd agree with the another poster (SecretSecondAccount), that you have a good baseline of (largely) inflation protected income already and that you could, therefore, keep the pensions for lump sum purchases or drawdown from the them using a variable approach (rather than the inflation linked constant pound approach - often, misleadingly, known as 'safe withdrawals' or the '4% rule'). For example, each year you could take a fixed 5% of the current pot value- it would give you 10k in the first year, but subsequent withdrawals would be dependent on investment performance and might not keep up with inflation. Something like Variable Percentage Withdrawals (VPW, see https://www.bogleheads.org/wiki/Variable_percentage_withdrawal ), is also a simple approach (and FWIW is the one we are using - we are in a similar situation where all of our common expenditure is covered by DB pension, and eventually, state pension).

The risk in deferring an annuity purchase you have identified can be summarised as
1) if interest rates don't fall too much or stay the same or go up and your pot value stays the same or increases in real terms, then you'll do better by delaying.
2) If those conditions are not met, then you may do worse by delaying.

The question then becomes whether you are willing to take that risk* (we'll only know what the better option was in 10 years time!)

* There is one possible way of offsetting the investment risk - you set aside the amount you want to purchase the annuity with in an inflation linked gilt (ILG) maturing in the year you want to make the annuity purchase. With real yields on 10 year ILG of about 0.5%, then there will even be a small amount of growth. However, this depends on your pension platform allowing you to buy individual bonds (some do, most do not).

westv

I'm sure there are a lot more people eyeing up annuities now, especially those who have nobody beyond their other halves they want to leave money to.

zagfles

OldScientist said:

Redlander said:

Our occupational pensions are  inflation-protected. My wife's, I think partially. each one provides 50% for the survivor.
We don't have a legacy motive as far as our pension pots are concerned. We have other savings I'd like to pass on.
I don't have a particular desired lifestyle, but I'd appreciate a bit more than we're due now.

I was thinking of deferring *buying* the annuities

The situation you mention - getting no more buying at age 75 than we would get now - is exactly what I was thinking f when I posted this enquiry.

I'd agree with the another poster (SecretSecondAccount), that you have a good baseline of (largely) inflation protected income already and that you could, therefore, keep the pensions for lump sum purchases or drawdown from the them using a variable approach (rather than the inflation linked constant pound approach - often, misleadingly, known as 'safe withdrawals' or the '4% rule'). For example, each year you could take a fixed 5% of the current pot value- it would give you 10k in the first year, but subsequent withdrawals would be dependent on investment performance and might not keep up with inflation. Something like Variable Percentage Withdrawals (VPW, see https://www.bogleheads.org/wiki/Variable_percentage_withdrawal ), is also a simple approach (and FWIW is the one we are using - we are in a similar situation where all of our common expenditure is covered by DB pension, and eventually, state pension).

The risk in deferring an annuity purchase you have identified can be summarised as
1) if interest rates don't fall too much or stay the same or go up and your pot value stays the same or increases in real terms, then you'll do better by delaying.
2) If those conditions are not met, then you may do worse by delaying.

The question then becomes whether you are willing to take that risk* (we'll only know what the better option was in 10 years time!)

* There is one possible way of offsetting the investment risk - you set aside the amount you want to purchase the annuity with in an inflation linked gilt (ILG) maturing in the year you want to make the annuity purchase. With real yields on 10 year ILG of about 0.5%, then there will even be a small amount of growth. However, this depends on your pension platform allowing you to buy individual bonds (some do, most do not).

That would eliminate investment risk but not the risk of annuity rates changing. Both could be hedged by buying longer dated index linked gilts, or maybe an index link gilts fund. Then if gilt prices rise back to the levels of a few years ago, and hence annuity rates fall, you should hopefully be compensated for the lower annuity rate by your pot having risen in value. Equally if gilt prices fall, you'd make a capital loss but annuity rates should rise.

NannaH

I’d keep the DC pots as back up should either of you need care,  you could then buy a care needs annuity so the massive amount of withdrawal needed wouldn’t be taxed. 

Linton

At the moment I suggest delaying buying an annuity until you are say 75-80.  By that age annuity rates increase significantly and you could be getting less happy managing the risk of an £n00K portfolio.