Fixed Term Annuity Rates - Does This Look Right?

GSP

I have just been on moneyhelper.org.uk and put some numbers in, but the results look far higher than I expected.

My quote was for a 61 year old, with a £670k pot (taxable), for 5 years, and receiving a guaranteed sum of £500,000.

I’m staggered by the results which were fairly similar.
The top one is receiving £5,496 monthly, which is £65,955 yearly, and £329,775 over the 5 years.

I must have pressed a wrong button somewhere!

I know rates have gone up in recent times, but does this look like complete fantasy?

QrizB

So you're giving them £670k and receiving £500k back plus £330k of payments?

That's a total gain of £210k over 5 years, 31% total, so just over 5.5% pa.

Malthusian

It's 5.4%pa as an Internal Rate of Return. So less than you can currently get from a five year term deposit (5.85%, although admittedly that's not for pension money).
The insurer only has to make 0.15%pa more than the risk-free rate on your money and everything above that is gravy for them.
What would you do with the £500k after the five years were up?

QrizB

Malthusian said:

It's 5.4%pa as an Internal Rate of Return.

OK, just less than 5.5%! I shouldn't try mental arithmetic so early in the morning

GSP

Malthusian said:

It's 5.4%pa as an Internal Rate of Return. So less than you can currently get from a five year term deposit (5.85%, although admittedly that's not for pension money).
The insurer only has to make 0.15%pa more than the risk-free rate on your money and everything above that is gravy for them.
What would you do with the £500k after the five years were up?

Good question! I suppose I would have only two options.
Take out another annuity, or reinvest in investments.
But rates could be low by then, and the markets may have recovered.
Such unknowns!

FIREDreamer

GSP said:

Malthusian said:

It's 5.4%pa as an Internal Rate of Return. So less than you can currently get from a five year term deposit (5.85%, although admittedly that's not for pension money).
The insurer only has to make 0.15%pa more than the risk-free rate on your money and everything above that is gravy for them.
What would you do with the £500k after the five years were up?

Good question! I suppose I would have only two options.
Take out another annuity, or reinvest in investments.
But rates could be low by then, and the markets may have recovered.
Such unknowns!

I am not confident of my investment skills now that I am close to early retirement.

This is why I have applied for a lifetime joint life RPI linked 10 year guarantee period annuity with 70% of my drawdown pot at a rate of 3.7% which seems acceptable.

These funds are held as cash in the SIPP pending transfer to the annuity provider once underwriting, medical records etc is carried out.

The remaining 30% is in global tracking exchange traded funds so platform fees are low.

Whilst still at work I will pay 80% of my gross salary (post salary sacrifice, down to min wage already) back into my pension (so whole salary is contributed effectively) whilst living on the annuity plus two small defined benefit pensions.

This gives a moderate lifestyle income which becomes luxurious (allegedly) when state pensions kick in.

Seems a fair compromise.

SVaz

Doesn’t MPAA apply if you buy an annuity?

Spivo46

SVaz said:

Doesn’t MPAA apply if you buy an annuity?

not if the annuity payment does not increase and is based on lifetime

BoxerfanUK

Firstly thanks to the OP for asking this question as it has opened mine and my other halves eyes to an alternative to lifetime annuities or DD, so I hope the OP doesn't mind, but I have a couple of questions. 

If you have say, a DC pension pot of 500K and you don't want to take the PCLS straight away...... could you take out a five year fixed term annuity for the full 500K just taking taxable annual income up to your marginal rate of 12570 and then at the end of the 5 years when you get back the maturity sum you put it back into a SIPP and from there take the PCLS either in one go or via UFPLS or Flexi access DD alongside any taxable DD?

Also, if this 500K is made up from 3 different pots with different companies do you have to merge them into one single pot before applying for said annuity or can the annuity provider take a transfer in from 3 separate pots?

Linton

BoxerfanUK said:

Firstly thanks to the OP for asking this question as it has opened mine and my other halves eyes to an alternative to lifetime annuities or DD, so I hope the OP doesn't mind, but I have a couple of questions. 

If you have say, a DC pension pot of 500K and you don't want to take the PCLS straight away...... could you take out a five year fixed term annuity for the full 500K just taking taxable annual income up to your marginal rate of 12570 and then at the end of the 5 years when you get back the maturity sum you put it back into a SIPP and from there take the PCLS either in one go or via UFPLS or Flexi access DD alongside any taxable DD?

Also, if this 500K is made up from 3 different pots with different companies do you have to merge them into one single pot before applying for said annuity or can the annuity provider take a transfer in from 3 separate pots?

1) You can only contribute above £3600 in a tax year to a pension scheme if it is all covered by your earned income.  Pension income is not "earned".

Why are you proposing to pay way over the odds for your 5 year annuity and then taking the remainder back?  Why not just buy the 5 year annuity without the pay-back.

2) Yes you can deal with multiple pension pots independently, in fact you have to.  If you want to use the money from multiple pots to buy a single annuity you have to merge them first.

BoxerfanUK

Linton said:

BoxerfanUK said:

Firstly thanks to the OP for asking this question as it has opened mine and my other halves eyes to an alternative to lifetime annuities or DD, so I hope the OP doesn't mind, but I have a couple of questions. 

If you have say, a DC pension pot of 500K and you don't want to take the PCLS straight away...... could you take out a five year fixed term annuity for the full 500K just taking taxable annual income up to your marginal rate of 12570 and then at the end of the 5 years when you get back the maturity sum you put it back into a SIPP and from there take the PCLS either in one go or via UFPLS or Flexi access DD alongside any taxable DD?

Also, if this 500K is made up from 3 different pots with different companies do you have to merge them into one single pot before applying for said annuity or can the annuity provider take a transfer in from 3 separate pots?

1) You can only contribute above £3600 in a tax year to a pension scheme if it is all covered by your earned income.  Pension income is not "earned".

Why are you proposing to pay way over the odds for your 5 year annuity and then taking the remainder back?  Why not just buy the 5 year annuity without the pay-back.

2) Yes you can deal with multiple pension pots independently, in fact you have to.  If you want to use the money from multiple pots to buy a single annuity you have to merge them first.

Thanks Linton.
1) OH is no longer contributing to her pension she currently has no earned income. Not currently taking from pension this tax year for tax reasons but planning to take income from next tax year up to personal allowance.  It just seemed like a 'no brainer' to take a tax free income between her age of 62 from next tax year and the 5 years to state pension age whether she needs the income or not!

I'm not quite sure what you mean?!  This seemed like a way of guaranteeing an income for 5 years without any significant risk to her pot.  Perhaps I am missing something obvious! 

2) Thank you.