Is now a good time to take an annuity ?

TJ666

I was surprised by how high annuity rates are currently (by historic standards).  Am I correct in thinking that now might be a good time to take an annuity ?  I'm 55, early retired, 33/35th of a state pension expected in 12 years time.  Lots of ISAs and some general investments, and low cost living, so I don't NEED the money now.  I had assumed that the best course of action for me was to take UFPLS for some years until I take an annuity (maybe in my 70s, when the rates will be better due my age.).  I *was* planning to take UFPLS to use up my tax personal allowance every year.  The amount will vary as tax thresholds change, and interest received changes.  

However, given the current annuity rates, should I take the opportunity and put some (say £100 k) of the pot into an annuity ?  I could dummy this up in a spreadsheet, but would need to get the right rates for more normal annuity rates, and make sure I'm comparing like with like (return back to today's value ?)

Any tips gratefully received. Thank you

Notes: I am keen on low cost solutions, so most of pot is in a SIPP, no kids, a husband who has similar pension pot.  Expect a long life (into 90s going by parents and grandparents).

sgx2000

You have missed the current boat by about 2 months.
The rates have dropped a little..
But still annuity rates are at a 15 year high

I feel fairly sure that the general advise you will get here is 'If you don't need it leave it alone'

Veteransaver

Trouble with buying an annuity at your relatively young age of 55 is that ideally you'd want some indexing type like 3% or rpi each year, but those don't ever look like great value imo if you don't need it yet.
A flat annuity taken now could be worth a lot less in real terms by the time you reach your 80s.

FIREDreamer

Veteransaver said:

Trouble with buying an annuity at your relatively young age of 55 is that ideally you'd want some indexing type like 3% or rpi each year, but those don't ever look like great value imo if you don't need it yet.
A flat annuity taken now could be worth a lot less in real terms by the time you reach your 80s.

Even at age 55, an RPI annuity rate isn’t too shabby.

zagfles

Annuities are better value now because gilt prices have fallen. When gilt prices fall, annuity rates generally rise and vv, because annuities generally use gilts. 

So if you don't want the income now but like the current annuity rates, the obvious hedge is to buy gilts or a gilts fund since the fund should rise if annuity rates fall and vv. That's the theory anyway, and you'd need to get the duration right - you don't want gilts which mature at or shortly after when you intend buying the annuity as the hedge will be lost. 

There are annuity tracking funds which might be worth looking at.

ukindexinvestor

absolutely not worth it, keep the money in the market. reset studies came out recently that its best to be 100% equity in stocks even in retirement

jamesd

FIREDreamer said:

Veteransaver said:

Trouble with buying an annuity at your relatively young age of 55 is that ideally you'd want some indexing type like 3% or rpi each year, but those don't ever look like great value imo if you don't need it yet.
A flat annuity taken now could be worth a lot less in real terms by the time you reach your 80s.

Even at age 55, an RPI annuity rate isn’t too shabby.

£3,344 single life RPI. 30 year drawdown plan could be £3,100+ but most likely with a lot of the money left over and also with the option to defer claiming the state pension to get 5.8% and buy an annuity when age leads to an increase.

Annuity rates go up at higher interest rates, down with lower.

It's a good time to be buying an annuity compared to a couple of years ago but drawdown looks like a better move.

Pat38493

ukindexinvestor said:

absolutely not worth it, keep the money in the market. reset studies came out recently that its best to be 100% equity in stocks even in retirement

Do you have a link or source with more details on this assertion?   A lot of the studies I’ve read were more along the lines of 80/20 giving the best long term safe withdrawal rates.

af1963

Cheapest (small) annuity you'll get is probably to buy the missing two years state pension at some stage, if that's what your "33/35" implies.

Next cheapest *might* be to defer state pension if you still have ISAs etc to live off at 67. You'd need to look at the rules at the time to see what you'd gain by giving up the pension for a period of time.

Beyond that, no "correct answers", as a lot depends on your health, outlook on inflation and investments, and attitude to risk - but a few thoughts, as I've been considering similar options:

if you commit to a RPI annuity now ( and based on the rates above) you'd guarantee an index linked £3300, which will probably all be taxable as soon as state pension starts.  ( although tax rules/allowances could change.)  That income wouldn't be vulnerable to investment losses or inflation, but wouldn't benefit from investment gains either. It buys some certainty. In about 30 years, at 85, you'll have received payments worth about the same value as the initial £100k price.

Another approach might be to get a level annuity now, £5700 in the above table, accepting that its value will decline - this gives more income up front which you can maybe arrange as non taxable, by leaving more in the SIPP/ISA for later. (By the time SP starts and you have to pay tax on it, its value and the value of the tax paid will be reduced by 12 years of inflation.)  

How long it takes to "get back the value of your £100k" with a level annuity depends on inflation over the term. If it averages about 3% or less, you'd get it back in under 25 years by age 80.  If it averages 5% or more you may never get the full value back because the later payments are worth so little. Also, high inflation early in the term would be more damaging  One year of 20% inflation at the start would reduce the value of all future payments by 20%. A year of 20% inflation when you're 90 can't affect the previous payments.

You get *some* certainty with this option ( no exposure to stock market rises or falls) but you bear all the risk of inflation.

westv

I'm not sure I understand the variable age for "getting your money back" with the level annuity quoted.
My calculator says 17.5 years. I don't see how that varies.

FIREDreamer

jamesd said:

FIREDreamer said:

Veteransaver said:

Trouble with buying an annuity at your relatively young age of 55 is that ideally you'd want some indexing type like 3% or rpi each year, but those don't ever look like great value imo if you don't need it yet.
A flat annuity taken now could be worth a lot less in real terms by the time you reach your 80s.

Even at age 55, an RPI annuity rate isn’t too shabby.

£3,344 single life RPI. 30 year drawdown plan could be £3,100+ but most likely with a lot of the money left over and also with the option to defer claiming the state pension to get 5.8% and buy an annuity when age leads to an increase.

Annuity rates go up at higher interest rates, down with lower.

It's a good time to be buying an annuity compared to a couple of years ago but drawdown looks like a better move.

A bit of both might be a reasonable compromise.

My pkan was to buy an annuity with 2/3 of my drawdown pot (just done) with the remaining being used for drawdown at 4% (80% global equity ETF, 20% cash) when i retire in the Summer.

I got a 3.8% annuity rate - joint life 50% spouse, 10 year guarantee, RPI escalation. Happy with that and makes the market movements on my drawdown pot more tolerable.

My ISA is also 100% equity, that’s enough investment risk for me.

YMMV 😀