Annuity thoughts

Albermarle

QrizB said:

Scallypud said:

I would agree they have stabled lately but i was comparing my pot to 15 months ago.

You also stated:

Scallypud said:

At the moment i have 360K SIPP in drawdown which is down 10% compared to  15 months ago.

This sounds like it could be a problem with your investments.

O the 9th of March 2022, for example, VWRL (an example index tracker) was £84.38. Today it's £87.44, so up 3.6%.

What is your £360k invested in? How did you choose that investment, and why do you now want to change?

(I realise the 9th of March was near the bottom of a dip in VWRL, but without specific dates it's the best comparison I can do.)

The OP is retired so not sure that a 100% equity tracker is a good example. If we look at Vanguard LifeStrategy 60 as an example it is down 5% since Feb 1st 2022 and VLS 40 - 8%. 
So a 10% drop is approx in line with what you might expect for a middle of the road type investment ( maybe a bit more )

OldScientist

Scallypud said:

Hi everyone ,
I am 60 yrs old and retired. I have just been diagnosed with diabetes type 2 so i decide to look in to annuities due to the volatile markets 
At the moment i have 360K SIPP in drawdown which is down 10% compared to  15 months ago.
I have been offered the following annuities
Life time Annuity £100,000 @ 7.13 %
Fixed Term Annuity ( Guaranteed Drawdown ) £150,000 = £10,000 annual income for 5 yrs with £148,000 Guaranteed Maturity Value.
This would leave £110,000 in drawdown and i have approx £30,000 in savings.
My annual expenditure is £16K

My question is what are you thoughts on the annuities or would i be better off sticking to drawdown and wait for the markets to recover.

As others have said, the lifetime annuity appears to be a a level one for a single life, so the real purchasing power will decrease with time (e.g., someone who'd bought the same product a year ago would have seen 10% removed from their spending power already). However, it has a payout rate above the norm (i.e., 6.3% for single life at 60 according to https://www.hl.co.uk/retirement/annuities/best-buy-rates ) (since it is enhanced because of your diabetes). Getting a quote for an inflation protected annuity might be useful, but the payout rate could be around 4% or so.

The fixed term annuity has an implied interest rate of just under 7%, so definitely better than sticking it in a saving account ladder (if that is possible) or Money Market Fund (i.e., likely to be better than drawdown - however, see next para).

Although you don't say, if you have any beneficiaries, you will have to bear in mind that if you die young, then the annuity premiums will be lost (with the fixed term case, is the guaranteed maturity value regardless of whether you survive or not?)

As for drawdown, for a longer term (e.g., 30 years), as a rough guide, inflation linked withdrawals (i.e., the SWR approach) historically would have given a withdrawal rate of 3.0%, while withdrawing level nominal amounts (i.e., to match the type of income provided by the level annuity) would have given about 5.0% (both figures dependent on portfolio, fees, stock allocation, etc.).  

DT2001

What is your priority, guaranteed income or the potential of a greater income from your pot?

If we assume you want guaranteed income of £16k p.a. at SPA and you are on a full pension then you need circa £5.5k from whatever your pot is then increasing by your inflation. If you choose option 1 you will have most of it covered unless inflation is high but hopefully have £250k in drawdown which you could safely (we all hope) take say 3% (£7.5k) p.a.

I do not know if you can get a deferred annuity  - if you buy your fixed term £150k and top up the £10k that produces with 6k for 6 years from your SIPP (say £50k allowing for higher inflation) could you get a deferred annuity inflation linked with the rest of your pot (£160k) at SPA to produce £5.5k p.a.? At SPA you will have £148k from the fixed term annuity and your savings.

If you take option 2 you need to take 4.5% of the £360k to produce £16k (ignored tax as unsure of your position) but only for 6 years. We do not know how your pot will have performed so you have the potential to be better or worse off.

Personally I’d take option 1 or a version of that as you have peace of mind with the potential for some upside.