Should we Buy an Annuity Now?

Redlander

Linton said:

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.

Thanks Linton. That was what I had been thinking of doing, but I was contemplating getting an annuity now because rates are unusually high. My thinking is that once inflation has reduced, interest rates will go down again so that the income from an annuity I get at 75 might be little different from what I would get now.

dunstonh

Thanks Linton. That was what I had been thinking of doing, but I was contemplating getting an annuity now because rates are unusually high

They are not unusually high.   They were unusually low.  They are actually still a bit lower than what may be considered average (if you put aside incorrect assumptions on mortality).

Index linked annuities have not gone up as much as level annuities.

My thinking is that once inflation has reduced, interest rates will go down again so that the income from an annuity I get at 75 might be little different from what I would get now.

Do you think gilt yields will return to their historical low or remain in their historical most common range? - if you think that a return to the lowest rates in the last 300 years is likely, buying earlier makes sense.   If you think we are now getting back to the historical norm (for the majority of the time) then it may not be the best point.

JohnWinder

‘buy annuities now. If we defer them, the annuity income would benefit from us having fewer year to live’

‘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’

Put aside age impaired risk management which I think is very important, and I don’t get the ‘buy later, get more in payments’ argument.

Yes, older age gives more in annual payments, but earlier gives you annual payments for the years between ‘earlier’ and ‘older age’. How does one decide which gives the bigger total payout, if that’s a measure of success in making your choice? My guess is the difference is small or non-existent, otherwise buyers would be onto the better option and the annuity provider would change their age related rates to remove the advantage, surely. In short, I’m not convinced of ‘buy later, it’s a better deal (or ‘rates increase significantly’ as put above).

Suhusa

The argument I could see that if you notice that handling things yourself becomes too onerous for whatever reason (for example because managing your health takes up more and more time) you still have the option to switch over to an annuity - if you don't leave it till too late.

zagfles

JohnWinder said:

‘buy annuities now. If we defer them, the annuity income would benefit from us having fewer year to live’

‘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’

Put aside age impaired risk management which I think is very important, and I don’t get the ‘buy later, get more in payments’ argument.

Yes, older age gives more in annual payments, but earlier gives you annual payments for the years between ‘earlier’ and ‘older age’. How does one decide which gives the bigger total payout, if that’s a measure of success in making your choice? My guess is the difference is small or non-existent, otherwise buyers would be onto the better option and the annuity provider would change their age related rates to remove the advantage, surely. In short, I’m not convinced of ‘buy later, it’s a better deal (or ‘rates increase significantly’ as put above).

Theoretically, buying earlier should give a higher lifetime payout simply because life expectancy (ie the expected age you'll live to) will be lower at 65 than at 75, because some people will die between those ages. Obviously the other side of the coin is that if you were to die before 75 having intended to buy at 75, someone could inherit the funds.

But there are other factors to consider, such as inflation, advantage of getting money earlier etc, so it's not a straightforwards calculation.

Redlander

dunstonh said:

They are not unusually high.   They were unusually low.  They are actually still a bit lower than what may be considered average (if you put aside incorrect assumptions on mortality).

Index linked annuities have not gone up as much as level annuities.

My thinking is that once inflation has reduced, interest rates will go down again so that the income from an annuity I get at 75 might be little different from what I would get now.

Do you think gilt yields will return to their historical low or remain in their historical most common range? - if you think that a return to the lowest rates in the last 300 years is likely, buying earlier makes sense.   If you think we are now getting back to the historical norm (for the majority of the time) then it may not be the best point.

I'm pretty ignorant about economics so I've no informed opinion about the future trends in gilt yields. I would naively suppose that once inflation has returned to a tolerable rate, then interest rates will fall back to the historically low levels we have been experiencing in recent years.

Does anybody anybody out there think any different? What would it take to make interest rates return long-term to their "historically most common range"?

scobie

Redlander said:

dunstonh said:

They are not unusually high.   They were unusually low.  They are actually still a bit lower than what may be considered average (if you put aside incorrect assumptions on mortality).

Index linked annuities have not gone up as much as level annuities.

My thinking is that once inflation has reduced, interest rates will go down again so that the income from an annuity I get at 75 might be little different from what I would get now.

Do you think gilt yields will return to their historical low or remain in their historical most common range? - if you think that a return to the lowest rates in the last 300 years is likely, buying earlier makes sense.   If you think we are now getting back to the historical norm (for the majority of the time) then it may not be the best point.

I'm pretty ignorant about economics so I've no informed opinion about the future trends in gilt yields. I would naively suppose that once inflation has returned to a tolerable rate, then interest rates will fall back to the historically low levels we have been experiencing in recent years.

Does anybody anybody out there think any different? What would it take to make interest rates return long-term to their "historically most common range"?

I think it’s more likely that both inflation AND interest rates will return to their historic norms, NOT the artificially low rates of the latter in the last decade. 

So that would mean inflation around 2-4 percent and interest rates around 5-7%

Albermarle

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 do not think anyone has mentioned it yet, but are you aware that any money in a DC pension pot, is not taken into account, when the Inheritance tax calculation is carried out on your estate?

If you or your wife's estate ( whoever dies second ),is likely to be liable for Inheritance tax , then if you do not buy an annuity, it might be better to use up savings and use the pensions instead as a way of passing money on.

Just another point to be aware of at least .

ukdw

Albermarle said:

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 do not think anyone has mentioned it yet, but are you aware that any money in a DC pension pot, is not taken into account, when the Inheritance tax calculation is carried out on your estate?

If you or your wife's estate ( whoever dies second ),is likely to be liable for Inheritance tax , then if you do not buy an annuity, it might be better to use up savings and use the pensions instead as a way of passing money on.

Just another point to be aware of at least .

Adding on to this point about IHT -  if any annuity is taken, and it contains a guarantee, and the annuity holder dies within the guarantee period, then the parts remaining annuity effectively become part of the estate and could generate some inheritance tax liability.  See https://www.gov.uk/government/publications/inheritance-tax-guaranteed-annuity-calculator

Redlander

At the risk of seeming obsessive about this (I actually am obsessed, and very nervous): there is speculation that interest rates may rise yet again after a review in June. Is this likely to be already priced into the annuity rates, or is it worth waiting a bit longer in case annuities rise?