Fixed Term Annuity - Use Part of Drawdown, Or The Whole Hog in This Product?

GSP

We’ll be meeting with our IFA in a couple of days time, and I know this product will form part of the discussion.
Whether the advice will be to fully engage in this for a period of time, or do part drawdown part annuity.

I am 61, have a drawdown total pension fund of £618k. Within this, £484k is taxable, £134k is uncrystallised so there’s 25% £34k tax free in there.

My wife is 56, her drawdown total pension fund is £145k. Within this, £8k is taxable, ££137k is uncrystallised so there’s also around £34k tax free in there.

Both of our funds are now just about out of cash, so it will mean selling investments in rebalancing in the short term.

I’ve been doing a lot of playing around with different scenarios with the limited availability of FTA calculators online. There’s my SP to consider in 5.75 years, but also tax as well. My wife will have an SP as well, but not for 11 years.

I am sure my IFA will have a good plan or advice, but there does seem to be many scenarios with this.

One thing at this time, the rates and returns in this product look pretty reasonable. To hand over a sum of money and guaranteeing a bit less in return provides a decent income. I have noticed though that rates come down quite sharply after 5 years.
Sod’s law things may change quite quickly however with the latest inflation figure due out on Wednesday morning, followed by the BoE decision the following day!

I like the security or rather stability that this product brings however the way markets have altered.

There’s so much to weigh up and I expect ‘ten different people to give ten different answers’, but it’ll be interesting if there’s a general theme overall from the community.

There’s also the question once my term is up, what do I do with the guaranteed sum them? Take out another annuity? Go back into drawdown? I suppose it really depends on the markets at the time.

Thanks

SVaz

With that amount available I would probably go partially for a lifetime annuity to give the certainty of say £10k a year with a yearly rise.
Then a five year guaranteed annuity.
I would leave at least £200k  in a drawdown state as you never know what the future holds,  you may need care fees ( then you could buy a care annuity that isn’t taxed 😉)  or to leave as an inheritance outside your estate. 
I’d love to be in a position to cover all those bases, it’s an ideal situation to be in. 

squirrelpie

You keep saying "this product" but don't give the name of the product or a link to it, so it's difficult to help.

GSP

squirrelpie said:

You keep saying "this product" but don't give the name of the product or a link to it, so it's difficult to help.

Sorry, here is a link I’ve been using.

https://comparison.moneyhelper.org.uk/en/tools/annuities

Qyburn

GSP said:

There’s also the question once my term is up, what do I do with the guaranteed sum them? Take out another annuity? Go back into drawdown? I suppose it really depends on the markets at the time.

If you buy a fixed term annuity with lump sum at the end of the term, does the lump sum go back into the pension pot, subject to the same tax rules?

GSP

SVaz said:

With that amount available I would probably go partially for a lifetime annuity to give the certainty of say £10k a year with a yearly rise.
Then a five year guaranteed annuity.
I would leave at least £200k  in a drawdown state as you never know what the future holds,  you may need care fees ( then you could buy a care annuity that isn’t taxed 😉)  or to leave as an inheritance outside your estate. 
I’d love to be in a position to cover all those bases, it’s an ideal situation to be in. 

Interesting, as I would not have considered a lifetime annuity, and thanks for your reply.
Yes, good point about holding some in drawdown for the future. With the decent current rates, I was thinking of taking out 5 year fixed term annuity, but receiving a high proportion of it back as a guaranteed amount.

The uncertainty though is what will conditions be like in 5 years time.

GSP

Qyburn said:

GSP said:

There’s also the question once my term is up, what do I do with the guaranteed sum them? Take out another annuity? Go back into drawdown? I suppose it really depends on the markets at the time.

If you buy a fixed term annuity with lump sum at the end of the term, does the lump sum go back into the pension pot, subject to the same tax rules?

I believe so.

Trapdoor

I’m currently in the process with my IFA of doing something similar although the tax free element of my SIPP will be invested elsewhere to keep it outside of the income tax regime. My plan is for this 5 year guaranteed annuity to carry me over until I receive my SP and I also have two smaller DB pensions currently in payment. After 5 years I get back my original ‘investment’ which I can then decide whether to go into flexible drawdown, take another fixed annuity or opt for a lifetime annuity.

Part of this plan is to protect against future losses (and of course gains), but the effective interest rate on some of these products is pretty good. My question to my IFA was …” if I took £30k per year in flexible drawdown, could you guarantee after 5 years my SIPP would be valued no less than it is now” … of course he couldn’t guarantee that … but with this ‘plan’ that is pretty much what I’m doing, with the added security knowing exactly how much per month I’m getting and that in 5 years my pension will be worth what it is today.

This will give me flexibility to stash any surplus monthly cash away, especially next year into my ISA. Yes, I get the ‘no inflationary protection’ bit, but that’s the point of stashing excess now which I can draw back as and when I need it.

Why not leave some in my SIPP? Because I’m still down about £60k from 3 years ago and I just don’t have much confidence in the markets with what I think may be coming down the line. I can relax for 5 years.

I guess I may have a different outlook on life now since plans were completely destroyed back in late 2019 when my wife passed away due to cancer. She died at 60 and never got the chance to enjoy her retirement or collect her state pension 😢

Qyburn

Trapdoor said:

 if I took £30k per year in flexible drawdown, could you guarantee after 5 years my SIPP would be valued no less than it is now” 

Is the lump sum at the end index linked, or is it a fixed value in £ and therefore potentially devalued by five years of inflation?

GSP

Trapdoor said:

I’m currently in the process with my IFA of doing something similar although the tax free element of my SIPP will be invested elsewhere to keep it outside of the income tax regime. My plan is for this 5 year guaranteed annuity to carry me over until I receive my SP and I also have two smaller DB pensions currently in payment. After 5 years I get back my original ‘investment’ which I can then decide whether to go into flexible drawdown, take another fixed annuity or opt for a lifetime annuity.

Part of this plan is to protect against future losses (and of course gains), but the effective interest rate on some of these products is pretty good. My question to my IFA was …” if I took £30k per year in flexible drawdown, could you guarantee after 5 years my SIPP would be valued no less than it is now” … of course he couldn’t guarantee that … but with this ‘plan’ that is pretty much what I’m doing, with the added security knowing exactly how much per month I’m getting and that in 5 years my pension will be worth what it is today.

This will give me flexibility to stash any surplus monthly cash away, especially next year into my ISA. Yes, I get the ‘no inflationary protection’ bit, but that’s the point of stashing excess now which I can draw back as and when I need it.

Why not leave some in my SIPP? Because I’m still down about £60k from 3 years ago and I just don’t have much confidence in the markets with what I think may be coming down the line. I can relax for 5 years.

I guess I may have a different outlook on life now since plans were completely destroyed back in late 2019 when my wife passed away due to cancer. She died at 60 and never got the chance to enjoy her retirement or collect her state pension 😢

Thanks for your reply, and so so sorry to hear of your loss Trapdoor.

I am likeminded as I too have major concerns for next year, and want stability in my income. I’ve been guilty of spending too much time watching numbers go up and down, and it would be good to have a period of some peace, financial wise at least.

My idea is not to make gains, but just making our fund last through the remaining years.

To come up with this plan, has it taken a while for you and your IFA to come to this point? All I can see my end are a number of different scenarios starting with how much to give and receive back from a Fixed Term Annuity.

Do you agree it’s not really worth looking further then the 5 year term rates offered? They seem to drop away quite sharply after that period. 

Trapdoor

Qyburn said:

Trapdoor said:

 if I took £30k per year in flexible drawdown, could you guarantee after 5 years my SIPP would be valued no less than it is now” 

Is the lump sum at the end index linked, or is it a fixed value in £ and therefore potentially devalued by five years of inflation?

It’s level, not index linked.

However, my view, right or wrong, after suffering not insignificant losses over the past 3 years … what is the likelihood of my ‘pot’ being worth exactly what it is today if I flexibly drawdown £30k each year … or even what is the likelihood my pot will have grown by £150k over 5 years if I drew nothing out of it except the fees?

Yes, I agree it would be nice to have the maturity value index linked but I don’t think that’s an option on these products plus the monthly payment would be significantly reduced. You only need to compare linked and level lifetime annuities to see this.

My plan is to haul as much as I can out of this annuity and I will stash any surplus into savings and my ISA allowance next year to offset any inflationary pressures. I’m pretty sure having a highish 6-figure pot still in 5 years time I’m going to be ok going forward, and I have other assets I can realise should the need arise.