Annuity dilemma

Qyburn

waveyjane said:

Out of interest, how is an annuity break-even point calculated?  I assume this is the point at which you receive your original investment back through income? 

That would break even compared to leaving the money in cash and earning no interest. If it's an RPI annuity that comparison might still be valid. 

JohnWinder

. said:

Out of interest, how is an annuity break-even point calculated?  I assume this is the point at which you receive your original investment back through income? 

I wonder if your thinking of a lifetime annuity as an investment might be better if you think of it as insurance. With insurance (house, luxury yacht etc) you hand over your money, gone forever, as a risk management strategy to hedge against uncertain loss which is too big to otherwise bear. A life annuity does just that, hedging you against market losses from which there won’t be time to recover. An investment seems different.

I suppose there are plenty of annuity products that promise ‘this much’ of your money back at the end of ‘this period’ etc, which seem to have investment properties, but they seem less appealing to me to the extent that if the annuity provider can make investments so can I cheaply and without them having to take any profit from the investments. A lifetime annuity is a horse of a different colour. That doesn’t invalidate break-even points, but changes their significance perhaps.

Malthusian

g002ahe said:

At the end of the day different annuity options are like different insurance t&c. its a gamble whichever way you do it - life expectancy vs inflation vs tax vs etc etc

A gamble has a payout if winning conditions are met. 3%pa escalation verges on being just a sacrifice. You allow the insurer to withhold a huge chunk of the income they would have paid to you in your 60s and 70s so they can pay it to you in your 80s / 90s / beyond instead, where it is likely to be much less use to you. 

westv

Malthusian said:

g002ahe said:

At the end of the day different annuity options are like different insurance t&c. its a gamble whichever way you do it - life expectancy vs inflation vs tax vs etc etc

A gamble has a payout if winning conditions are met. 3%pa escalation verges on being just a sacrifice. You allow the insurer to withhold a huge chunk of the income they would have paid to you in your 60s and 70s so they can pay it to you in your 80s / 90s / beyond instead, where it is likely to be much less use to you. 

You potentially have the same issue with an inflation linked annuity - you have less now in return for more later.
With a level annuity you have more now in return for less later. Although the total received might end up being more.

Malthusian

westv said:

You potentially have the same issue with an inflation linked annuity - you have less now in return for more later.

True, but an inflation-linked annuity will at least leave you better off than a level one in the long run if inflation is 10%pa plus for most of your retirement, and you make it to your average life expectancy and beyond. So an RPI-linked annuity is a "gamble" with a potential payout. It can also be quite reasonably looked upon as insurance against inflation rather than a gamble. Especially if you don't have any need or want for more income than an RPI-linked annuity can provide.

A 3% fixed escalation annuity offers no protection against inflation; if inflation remains at 10%pa for the long term, it will lose value at 7%pa (roughly). "But isn't that better than a level annuity losing value at 10%pa?" No, because a fixed term annuity gives up income now in exchange for income later at an amount fixed at outset, and high inflation erodes the value of that future income you are banking on.

If you buy a fixed-escalation annuity you are gambling that inflation will go low and stay low, to a greater extent than someone who buys a level annuity.

Bear in mind that the poster who bought the 3% escalating annuity in his thread still has £450,000 in their pension fund after buying the annuity. If they'd bought a level annuity on the same terms they would have around £540,000. Realistically they are not going to be left in penury by inflation whatever happens. (Unless they stick their remaining pension fund in cash and the UK does a Zimbabwe.)

sgx2000

Just for info...
As per my previous thread
Roughly £78k in pot

Aviva (my current pension provider)  Flat pension with 10 year guarantee offered  £5600

HL search best quote £5900 with L&G

Then went straight to L&G offer £6100

£500 per year more than my current pension provider......
or £10,000 over a 20 year retirement..... 

£10,000 just for shopping around....
Bloody thieving pension companies... 

westv

I never really look at HL's enhanced rates tables on their "best buy page" but I was curious to know why (as at 28/9/23) the "high blood pressure and cholesterol" rate (£ 7,338) is lower than the "no health details"  rate (£7,606)

https://www.hl.co.uk/retirement/annuities/best-buy-rates

dunstonh

westv said:

I never really look at HL's enhanced rates tables on their "best buy page" but I was curious to know why (as at 28/9/23) the "high blood pressure and cholesterol" rate (£ 7,338) is lower than the "no health details"  rate (£7,606)

https://www.hl.co.uk/retirement/annuities/best-buy-rates

It's been asked before, and it has to be wrong research.   Possibly, the provider that was top on clean health failed to quote on hypertension/cholesterol terms (it happens sometimes, and you need to refresh the quote), and they displayed the next best.

Someone with hypertension/cholesterol cannot get a lower annuity rate than clean health.  At worst, it would be the same as clean. Never lower.

Spivo46

Try the money helper website calculator, or better still the L&G website have a great range of options and free quotes online there and then. I am going for a 3 year fixed term retirement income plan. I am putting the full pension pot in (minus the TFLS), taking a yearly income and all of the cash investment back plus a bit more after 3 years

Spivo46

Canada Life are the best quotes on the market at the moment. i decided against going with them due to the reviews / ratings on Trust Pilot. Retirement Line gave exactly the same quotes. So, going with L&G who seem a little more reliable