Thoughts on partial annuity with £1M dc pot

toolateforsums

I had considered flexible drawdown for my pension only, but a couple of big world events, namely Covid and Ukraine have made me realise that perhaps i should secure some pension with drawdown to cover all bills and food. I see China and Taiwan as a major concern moving forwards.

My monthly requirements are around £1600 .Allowing for income tax and giving some extra headroom to allow for some inflationary effects initially until SP kicks in ,which in turn should then cover quite a few years of inflationary effect(not at current rates!!) means I have rounded this up to £25000. Assuming my expenditure levels drop each decade as i become less active as well should also reduce my monthly requirements.

Quoted annuity rates, 100% spouse , no rpi. are around £100k for £5800 annual pension for me , so i would need to take around £430k from my £1M pot.This would still leave £570k for drawdown .It sounds like a safe option ? What is everyone else doing with a similar pot? Leaving it all in drawdown or securing some income? The RPI option doesn't look value for money so I am discounting that.

Appreciate your thoughts, but know we don't have a crystal ball as that would make it far too easy!

I am shortly to be 58 , in reasonable health and no mortgage if that helps !

Dazed_and_C0nfused

Have you looked at the long term impact of going with a level annuity?

The RPI inflation protection will clearly give a lower starting point but without it your £24,940 will quickly lose value.

OldScientist

The impact of inflation on the income from a level annuity can be significant over a long retirement (potentially 40 years or more). For example, here is a plot of real income as a function of time for a retiree purchasing an annuity in 1970 (using UK CPI). After 10 years, the income was reduced by 70% in real terms - so £5800 would have a purchasing power in today's money of about £1740 and about £1100 after 20 years. Of course, the equivalent RPI annuity (100% joint at 58 yo) would only pay about £3000 per year per £100k at the outset.



That said, if your spending is going to be around £25k and, in time, you each have a full state pension, i.e., about £21k then in a decade's time you are only going to need about £4k from portfolio and annuity, so maybe the effects of inflation on a level annuity over that 10 year period could be countered by increased portfolio withdrawals.

If it is the gap between now and state pension that is of concern, then a fixed term annuity, maturing individual bonds (inflation linked), or cash/Money Market funds could be considered instead of a lifetime annuity.

Albermarle

Assuming my expenditure levels drop each decade as i become less active as well should also reduce my monthly requirements.

This is a big assumption. In many cases costs start to increase again as you get older. You maybe have to pay for domestic/garden help, care costs, moving to a more suitable home, paying for private medicine, helping family members etc.
If at the same time the real value of your £25Kpa has dropped by more than half, then.....

Bostonerimus1

Albermarle said:

Assuming my expenditure levels drop each decade as i become less active as well should also reduce my monthly requirements.

This is a big assumption. In many cases costs start to increase again as you get older. You maybe have to pay for domestic/garden help, care costs, moving to a more suitable home, paying for private medicine, helping family members etc.
If at the same time the real value of your £25Kpa has dropped by more than half, then.....

Many studies have shown that spending decreases with age. But that often only includes discretionary spending on things like holidays, clothing etc. The big cost could be long term care and other requirements that you mention like domestic help, but those will also depend on family circumstances. eg I'm single and live in the US and all my family is in the UK so when I need some extra care I have long term care insurance that will pay for a lot and also savings to cover what insurance misses and I could also move back to be closer to family. It's good to have a couple of options.

Bostonerimus1

toolateforsums said:

I had considered flexible drawdown for my pension only, but a couple of big world events, namely Covid and Ukraine have made me realise that perhaps i should secure some pension with drawdown to cover all bills and food. I see China and Taiwan as a major concern moving forwards.

I had very similar thoughts when planning my retirement and in my early 40s I took a job with a good DB pension to achieve the stable income source that you are looking to generate with an annuity. It has worked out well as I took that DB pension at age 55 and I'm now in my early 60s and living off the pension and some rental income and my DC money hasn't been touched. My DB pension is index linked so I encourage you to think carefully about planning for inflation, but the general idea of using things like SP and an annuity to cover your basic needs is a good one IMO and that leaves the DC and ISA etc components to grow and/or be used for the extras. The regular income my DB pension provides allows me to be sanguine about market turmoil.

Bostonerimus1

OldScientist said:

The impact of inflation on the income from a level annuity can be significant over a long retirement (potentially 40 years or more). For example, here is a plot of real income as a function of time for a retiree purchasing an annuity in 1970 (using UK CPI). After 10 years, the income was reduced by 70% in real terms - so £5800 would have a purchasing power in today's money of about £1740 and about £1100 after 20 years. Of course, the equivalent RPI annuity (100% joint at 58 yo) would only pay about £3000 per year per £100k at the outset.



That said, if your spending is going to be around £25k and, in time, you each have a full state pension, i.e., about £21k then in a decade's time you are only going to need about £4k from portfolio and annuity, so maybe the effects of inflation on a level annuity over that 10 year period could be countered by increased portfolio withdrawals.

If it is the gap between now and state pension that is of concern, then a fixed term annuity, maturing individual bonds (inflation linked), or cash/Money Market funds could be considered instead of a lifetime annuity.

The compounding effects of inflation are nicely shown here...there's a reason why RPI linked annuities are so much more expensive than fixed payment ones.

SouthCoastBoy

My opinion is i would only take out an annuity with inflation protection, otherwise you are only swapping one risk for another.

I have considered annuities but my wife has a small local authority db pension, so that coupled with 2 state pensions should cover us for essentials.

DT2001

If the requirement is just to produce income of £25k until SPA and then £4K thereafter I’d just use drawdown combined with a cash pot of say 2/3 years. SWR  for the U.K. are supposedly 3.2 - 3.5% (maybe a little higher for globally diverse portfolio) so £25k from £1m pot would seem very safe. Personally I’d consider natural income using investment trusts, insurance company bonds etc.

Steve_666_

I did some crude analysis of this, found that the RPI to be superior to a fixed annuity, overtook the single in terms of annual payments in about 10 years, overtook total recieved in 17-18. Of course these are dependent on assumptions. One thing that strikes me, 5.8% for life with no growth or drawdown facility, I think I could do better. There are many Investment trusts, OEICs, ETFs that are paying a dividend higher than 5%, with the promise of growth and therefore drawdown. the downside of this is that you take on the risk, so spread you cash far and wide.

Malthusian

Steve_666_ said:

I did some crude analysis of this, found that the RPI to be superior to a fixed annuity, overtook the single in terms of annual payments in about 10 years, overtook total recieved in 17-18. 

It's interesting that you consider that "superior"; those figures mean that someone buying an annuity at 65 would need to live till 83 before they were better off, having sacrificed a significant chunk of their income in their most active years.

(*edit* Forgot that the OP stated they were 58. For a 58 year old with a 100% widow(er)'s pension for a spouse of the same age, if RPI inflation goes back to an average of 2.5%pa, the break even point for inflation linking is basically never. It cuts the starting income in half and you almost have to do a Jeanne Calment to get that lost income back. If it persists at 5%pa you break even at 84, after 26 years.)

People seem to be overlooking that the OP will have £570k left in the pot - which can be left to grow free of the burden of regular withdrawals - to pay for future gardeners and stairlifts.

Care costs are a completely different ballgame. £570k will buy you quite a lot of domiciliary care, and once you go into full-time care, the capital in the home usually becomes available. In any case, it has nothing to do with a discussion about whether to buy inflation-linking; no amount of inflation linking is going to make an annuity at 58 cover future care costs.

One thing that strikes me, 5.8% for life with no growth or drawdown facility, I think I could do better. There are many Investment trusts, OEICs, ETFs that are paying a dividend higher than 5%, with the promise of growth and therefore drawdown.

Leaving aside that it's a risk and not a promise: the OP actually wants £5,800pa from a fund of £670k. (They are setting aside £330k to be drawn rapidly to bridge the gap to State Pension.) At a withdrawal rate of 0.86%pa it would take a global economic catastrophe for them to run out, assuming a globally diversified drawdown fund. The kind that makes this discussion moot because if global asset values have permanently collapsed, annuity providers will be going bust en masse as well.