Annuity Rates

Mutton_Geoff

ukdw said:

Spivo46 said:

Sorry, its more than 6% because i have built in an annual increase of 3%. So pretty good

For my situation when I compared a level to a 3% escalating I calculated that it would be year31 before the 3% escalating had completely caught up with the level (in terms of total money paid back me) - which for me is a bit too far away - so I decided to go for level.

Did you compound the 3% or just do 31x3% to arrive at the same total paid?

ukdw

@Mutton_Geoff - compounded -  via separate rows in a spreadsheet for each year - with each row multiplying the previous one by 1.03. Then an accumulating sum column.

Whilst in absolute terms I saw break even as coming in year 31 - that doesn't take into account the potential greater value of getting extra cash earlier. I.e. If I was to put all of the extra cash received in the early years of the level annuity into some sort of interest bearing account it will probably have compounded up to quite a lot by the time the escalating annuities annual amount has caught up.

Mutton_Geoff

ukdw said:

@Mutton_Geoff - compounded -  via separate rows in a spreadsheet for each year - with each row multiplying the previous one by 1.03. Then an accumulating sum column.

Whilst in absolute terms I saw break even as coming in year 31 - that doesn't take into account the potential greater value of getting extra cash earlier. I.e. If I was to put all of the extra cash received in the early years of the level annuity into some sort of interest bearing account it will probably have compounded up to quite a lot by the time the escalating annuities annual amount has caught up.

Thank you for clariying. It's probably not a valid comparison to calculate interest on the annuity payments as if they were reinvested, after all, the only point of money is to spend it, give it away or invest it. To take it from one investment (pension fund) to another not generally intended for that purpose (annuity > savings account) would take some deep thinking.

Like you, I am looking at level annuities as a way to get more now in the early years of retirement and then let inflation erode it rather than indexing it when my other pensions (state and DB) are already indexed. I currently manage my own SIPP and am weighing up scenarios of a 7.5% "burn" on the portion of my SIPP (60%) that I earmarked for annuity purchase for a decade then reducing later depending on a 1/n calculation where n was my life expectancy at that point (age 75). My own maths is 7.5% on 60% is equivalent to 4.86% which is less than my planned 5% drawdown in any case.

To buy an annuity (guaranteed income) or "self annuitise" (is that a word?) and still retain the pot is current thought process.