Asked to purchase an immediate annuity at age 55 but option 1 or option 2 ? Advise needed please !

s2020x

xylophone said:

Then what is the point of worrying about drawdown?

Yes, there is no point worrying about drawdown if the option isn't there. But as so many experts have replied about drawdown as a potential option 3 that isn't there, it was a hypothetical question to these experts whether drawdown can match the 3K per month if you go the annuity way in option 2. Based on the replies to this point so far, not sure, but lets wait and see any further responses

s2020x

Albermarle said:

This rate at age 55 is about 3% , so £13,500 pa.
However and this is a very important point, this calculation takes into account that it will increase with inflation every year.
I think the figures you quoted were for a level annuity ie not increasing with inflation. Over 30 or 40 years inflation could destroy the value of the annuity income. 
So maybe you had better get some quotes for inflation linked annuities to get a better comparison.

Thank you. That is £1125 per month. Adding that to the DB, that would be a total monthly income of £1825 with the annual increase you mention. That would be along the lines of what I currently spend each month.

s2020x

Pat38493 said:

As regards the annuity - 3K per month might be a lot now but in the first post you mention that some of it is  not inflation linked - you would be surprised how quickly that will be eroded by inflation over a retirement timespan.  You might want to do some calculations about that to see if you are happy with it.

Thank you for your reply. In my younger years of retirement, I would definitely like to have more money to spend on things and the travel I want to do, starting in the next couple of years hopefully! To put things in perspective,  My mum and dad who are are in their 70/80's spend alot less than they used to, more time in the garden, more chilled out, so maybe there is a counterbalance there to the year on year rise you mention, as they spend less as they get older.

Albermarle

s2020x said:

Pat38493 said:

As regards the annuity - 3K per month might be a lot now but in the first post you mention that some of it is  not inflation linked - you would be surprised how quickly that will be eroded by inflation over a retirement timespan.  You might want to do some calculations about that to see if you are happy with it.

Thank you for your reply. In my younger years of retirement, I would definitely like to have more money to spend on things and the travel I want to do, starting in the next couple of years hopefully! To put things in perspective,  My mum and dad who are are in their 70/80's spend alot less than they used to, more time in the garden, more chilled out, so maybe there is a counterbalance there to the year on year rise you mention, as they spend less as they get older.

Spending patterns in retirement have been debated on this forum many times.
Although many spend less as they get older ( like your Mum and Dad) there is often a point where spending starts to go up again. Paying for help around the home and garden for example. Then of course there are possible care costs, which can be very expensive if you have to pay them all yourself. 

s2020x

Albermarle said:

Spending patterns in retirement have been debated on this forum many times.
Although many spend less as they get older ( like your Mum and Dad) there is often a point where spending starts to go up again. Paying for help around the home and garden for example. Then of course there are possible care costs, which can be very expensive if you have to pay them all yourself. 

My mum and dad make me mow the grass and jobs around the house when ever I go lol ! I'll have to train my kids lol

s2020x

Albermarle said:

So maybe you had better get some quotes for inflation linked annuities to get a better comparison.

Ok, I have done 3 annuity quotes on £319K pot. Level = £1372 (slightly up) , LPI = £657 , RPI = £630

All quotes are joint annuities, 30 year at 100%.

Age 55 – 68 …. payment for level annuity would be DB £633 + ANNUITY £1372 + LUMP £157000/156 months = £1000 .

Total = £3000 per month.

Age 55 - 68 ... payment for RPI annuity would be DB £633 + RPI ANNUITY £630 + LUMP £157000/156 months = £1000 .

Total = £2200 per month plus RPI increase per year on the £630.

Regarding the drawdown you mentioned as a comparison, and the SWR  at £13500 (or £1125 pm) on the 450K pot, add the DB £731 and I get a total of £1850 per month

So, £3000 level annuity vs £2200 RPI annuity vs 1850 drawdown SWR per month

Audaxer

s2020x said:

Regarding the drawdown you mentioned as a comparison, and the SWR  at £13500 (or £1125 pm) on the 450K pot, add the DB £731 and I get a total of £1850 per month

Regarding drawdown, £13,500 annually from a £450k pot is 3% which seems a bit on the cautious side. In the UK it is usually said that 3.5% plus inflation each year is considered pretty safe.

You have said drawdown is not an option on your current pension, but as others have said it could be an option if you transferred to another provider. If you have totally discounted drawdown that is fair enough, but just something to consider if you did want to transfer to another provider. 

Qyburn

s2020x said:

Ok, I have done 3 annuity quotes on £319K pot. Level = £1372 (slightly up) , LPI = £657 , RPI = £630

All quotes are joint annuities, 30 year at 100%.

If you're going for 100% joint, do you need the guarantee?

Albermarle

Audaxer said:

s2020x said:

Regarding the drawdown you mentioned as a comparison, and the SWR  at £13500 (or £1125 pm) on the 450K pot, add the DB £731 and I get a total of £1850 per month

Regarding drawdown, £13,500 annually from a £450k pot is 3% which seems a bit on the cautious side. In the UK it is usually said that 3.5% plus inflation each year is considered pretty safe.

You have said drawdown is not an option on your current pension, but as others have said it could be an option if you transferred to another provider. If you have totally discounted drawdown that is fair enough, but just something to consider if you did want to transfer to another provider. 

I think the 3% was based on retiring at 55.

xylophone

 if you transferred to another provider. 

Other posters have suggested this but it would appear that the rules of the scheme do not permit?

 I have also spoke to my employer many times. As said, its either option 1 or 2 due to the rules of my pension. No flex. I have to get an immediate annuity. I am ok with this.

Presumably this is because the DC is inextricably linked with the DB?