Buying an annuity now

Johnnyy_Boy

I am coming up to 68 and plan to probably work another year or two. Currently have a pot around 600k, get my state and a very small DB of 4K per annum. A 40% tax payer.

So my question is, given the high interest rates, would it be better to purchase an annuity at this time and take the tax hit now given that in a couple of years time the rates may well be much lower and the annuity could be a few K a year less.

Thanks

barnstar2077

Could you not just retire now and purchase an annuity?  My mum passed away before 70.  I hope you live to a ripe old age, but nothing is guaranteed.

squirrelpie

Equally, every year you defer buying an annuity the rate will go up because of your increasing age. Which one will win?

Johnnyy_Boy

barnstar2077 said:

Could you not just retire now and purchase an annuity?  My mum passed away before 70.  I hope you live to a ripe old age, but nothing is guaranteed.

Of course I could but currently I enjoy what I do. 

QrizB

Johnnyy_Boy said:

barnstar2077 said:

Could you not just retire now and purchase an annuity?  My mum passed away before 70.  I hope you live to a ripe old age, but nothing is guaranteed.

Of course I could but currently I enjoy what I do. 

Do you enjoy it more than you would enjoy being retired?

Life is a zero sum game. Every year you spend working is a year you don't spend retired.

hara____

I can see why you might want to buy an annuity now - the certainty you'd gain would probably outweigh any income tax inefficiency.

Were you thinking of using just part of your pot for the annuity? There's a lot to be said for a mixed approach: buy the security of an annuity with part of the pot and then keep some unused for the added flexibility that brings.

Johnnyy_Boy

QrizB said:

Johnnyy_Boy said:

barnstar2077 said:

Could you not just retire now and purchase an annuity?  My mum passed away before 70.  I hope you live to a ripe old age, but nothing is guaranteed.

Of course I could but currently I enjoy what I do. 

Do you enjoy it more than you would enjoy being retired?

Life is a zero sum game. Every year you spend working is a year you don't spend retired.

As I have never been retired I guess that’s an open question. I often wonder what I would do when retired and it’s the middle of a cold winter. Will find out one day.

So long as I enjoy the challenge of the work I prefer to continue. I’m sure one day I will realise I’ve had enough. 

OldScientist

Johnnyy_Boy said:

I am coming up to 68 and plan to probably work another year or two. Currently have a pot around 600k, get my state and a very small DB of 4K per annum. A 40% tax payer.

So my question is, given the high interest rates, would it be better to purchase an annuity at this time and take the tax hit now given that in a couple of years time the rates may well be much lower and the annuity could be a few K a year less.

Thanks

Here are a few things to think about.

For an RPI linked annuity, the payout rate increases from 4.7% to 5.7% going from 65 to 70 (see https://www.hl.co.uk/retirement/annuities/best-buy-rates ) in other words, about 20 basis points per year.

On these grounds, assuming bond yields stay the same, delaying for two years would increase the payout rate from roughly 5.3% to 5.7%.

Very roughly, annuity rates fall by 50 basis points for every 100 basis points fall in bond yields. In other words, if the yields to maturity of inflation linked gilts were to fall by about 80 basis points in the next 2 years, then that would balance out the age related increase. Conversely, if yields continue to go up, then the annuity payouts will increase.  Of course, no-one knows what will happen to gilt yields (inflation linked gilt yields, and hence annuity rates, are not solely related to the base rate - they depend on market estimates of future inflation as well as international confidence in UK PLC).

Finally, the real value of your pension pot in two years is unknowable - it could be higher, the same or lower (e.g., if there is a sharp fall in stock prices) and, in the last case, it would then buy less income.

Timing the market (whether in stocks, bonds, or annuities) is never going to be straightforward.

I note that if you used half your pot to purchase a single life annuity (current payout rate of ~5.3%) it would provide income of £15900, all of which would be taxed (so you'd actually only receive £9540) for two years (i.e., a total tax of £7632 - since post-retirement it appears you will be a 20% taxpayer, the tax savings will amount to half that).

You could ask for the annuity income to be paid annually in arrears which would halve the tax amount (but future payments arriving annually rather than monthly might be annoying) since it would defer the first payment to the next tax year (I'm no expert, but am assuming the tax is due in the year in which the income arrives). I think you can defer for short periods too (up to a year? - maybe one of our resident IFAs can chip in) which might also reduce the tax hit.

My own view (FWIW) is that the income from the annuity is for a lifetime and therefore thinking longer term is probably more important than worrying about a short term tax hit. In other words, purchasing it now gives you some certainty in your baseline retirement income around which you can plan everything else.

OldMusicGuy

If you can't decide, why not use part of your DC pot to buy an annuity now? That way you are hedging your bets. 

That's what I did. I am retired but had not planned to use my DC pot for an annuity until age 75 at the earliest. But with rates so good and investment returns looking sluggish compared to the last 10 years, I used half my pot to buy an annuity at age 65. Really glad I did.

RogerPensionGuy

OldScientist said:

Johnnyy_Boy said:

I am coming up to 68 and plan to probably work another year or two. Currently have a pot around 600k, get my state and a very small DB of 4K per annum. A 40% tax payer.

So my question is, given the high interest rates, would it be better to purchase an annuity at this time and take the tax hit now given that in a couple of years time the rates may well be much lower and the annuity could be a few K a year less.

Thanks

Here are a few things to think about.

For an RPI linked annuity, the payout rate increases from 4.7% to 5.7% going from 65 to 70 (see https://www.hl.co.uk/retirement/annuities/best-buy-rates ) in other words, about 20 basis points per year.

On these grounds, assuming bond yields stay the same, delaying for two years would increase the payout rate from roughly 5.3% to 5.7%.

Very roughly, annuity rates fall by 50 basis points for every 100 basis points fall in bond yields. In other words, if the yields to maturity of inflation linked gilts were to fall by about 80 basis points in the next 2 years, then that would balance out the age related increase. Conversely, if yields continue to go up, then the annuity payouts will increase.  Of course, no-one knows what will happen to gilt yields (inflation linked gilt yields, and hence annuity rates, are not solely related to the base rate - they depend on market estimates of future inflation as well as international confidence in UK PLC).

Finally, the real value of your pension pot in two years is unknowable - it could be higher, the same or lower (e.g., if there is a sharp fall in stock prices) and, in the last case, it would then buy less income.

Timing the market (whether in stocks, bonds, or annuities) is never going to be straightforward.

I note that if you used half your pot to purchase a single life annuity (current payout rate of ~5.3%) it would provide income of £15900, all of which would be taxed (so you'd actually only receive £9540) for two years (i.e., a total tax of £7632 - since post-retirement it appears you will be a 20% taxpayer, the tax savings will amount to half that).

You could ask for the annuity income to be paid annually in arrears which would halve the tax amount (but future payments arriving annually rather than monthly might be annoying) since it would defer the first payment to the next tax year (I'm no expert, but am assuming the tax is due in the year in which the income arrives). I think you can defer for short periods too (up to a year? - maybe one of our resident IFAs can chip in) which might also reduce the tax hit.

My own view (FWIW) is that the income from the annuity is for a lifetime and therefore thinking longer term is probably more important than worrying about a short term tax hit. In other words, purchasing it now gives you some certainty in your baseline retirement income around which you can plan everything else.

Good post here, tks.

Reference buying a deffered annuity now and in starts paying in the future to capture today's rate, but get income when it better personally suits you, that's possible, I posted a link on here that another member signposted. 

I'll try finding it and try plonking it on this thread, I'm just not very good with all this IT & interwebb stuff unfortunately. 

I think the title of the thread had annuity or annuities in the title. 

I'm still on the fence like normal, but am still thinking I'll buy a deffered starting annuity in the next few months using DC funds and active DB when it suits me and DC drawdown as, when if ever I desire. 

Hopefully the link below will work, in one of my posts, I mention which site was easy to use looking at getting a deffered annuity, maybe I'll go back on and try to see the maximum deferral period possible.

Cheers Roger. 

☆☆☆☆☆☆☆

https://forums.moneysavingexpert.com/discussion/6458729/annuity-rates-on-the-up-is-now-a-time-to-buy-one/p4

sgx2000

Same boat...... But my dc pension by comparison is a canoe . Yours is a cruise ship..  .
At 63
I have a db pension, rpi linked, currently paying.
At 66 the SP and the db will almost pay all my current monthly expenditure.

BUT i also have a small £77k dc pension
This leave me with the same catch 22 choice....
Buy an annuity now... currently paying approx 4%  the same ss you can roughly expect as a drawdown....

So the big question is
Are annuity rates more likely to go down or up?

Oh! And my crystal ball just seems to be foggy