Annuity Purchase Cost

Bostonerimus1

FIREDreamer said:

Bostonerimus1 said:

FIREDreamer said:

Bostonerimus1 said:

FIREDreamer said:

dunstonh said:

Using an IFA might have taken longer and mean that my annuity would have been lower due to rates going down.

Although, it may have been higher?  Did you get the computer rate or did HL ring Just to get the uplifted rate?

The computer rate off the website was something like £24,100 which I was happy with. It took ages for the funds to go to Just as it kept bouncing back (return date matched the send date so no interest lost) as Hargreaves got the reference number wrong twice. When it did go through I found that the annuity had gone up a bit so I was happy with that.

As rates have come down since then I think the timing was good and if I had gone with an IFA it could have taken longer and the rate might more likely to been lower as a result.

I was able to answer health questions on the web site but whilst it did impact all the other providers it made no difference with Just (same rate with or without health questions - i have a login with health declaration and another without to do a comparison) who were higher anyway.

I might use an IFA if I buy an annuity with the rest of the pot in the future though. Annuity rates might have stabilised by then and we would also be older.

I'm generally against annuities for anything other than providing a bare minimum of income you need to survive as they are expensive and will probably reduce the amount you can leave to heirs. They do offer longevity insurance and the certainty of a lifetime cheque and with rates higher than they have been for a while people will start to consider them again, but make sure you understand the fees and costs and I'd keep most of your money liquid in stocks, bonds, cash etc and do drawdown for it's low cost, flexibility, potential investment returns and to pass money onto children and charities etc.

I used approx 70% of my drawdown pot to buy an annuity. This leaves £300k in drawdown plus another maybe £50k to crystallise once I retire in June.

Also have over £600k in an ISA fully invested in a portfolio of investment trusts yielding over 4%. The dividends plus £20k subscriptions are just reinvested. I might tidy this up this year and just go for global trackers like HMWO / VWRL for simplicity.

That’s enough in investments so I was happy to take an annuity.

I got a rate of about 3.8% joint life RPI with a 10 year guarantee for ages 59/58.

That purchase money (the post crystallisation gain anyway) has also been removed from any potential LTA charge should that be reintroduced in the future.

My wife isn’t going to be interested in investments so again the “needs and requirements” are covered. The drawdown can go to luxuries. Unless the tax thresholds move soon, the annuity plus db plus state pension will use up my basic rate tax and I will not drawdown at 40% tax! That can be inherited.

You've made choices applicable to your circumstances. I think the hostility to annuities comes from a purely financial return perspective and with the attitude that markets will always deliver robust returns. The "absolutely never" folks don't consider the psychology or personal circumstances of many retirees. Of course annuities also rely on market returns, but the buyer is insulated from market fluctuations by their policy. I'm a big advocate for diversity in income generation and how much annuity/DB/SP vs drawdown is a very personal decision, but my inclination is to cover essentials with guaranteed income and as I'm single I don't need to consider a spouse which is a big factor.

I had to buy an annuity because if I just relied on drawdown plus 2 db then I would have been stuck in one more year syndrome and being to afraid to retire. Buying the annuity has given me the confidence to hand in my notice and retire in June. That, to me, is priceless. 😀

I'm not sure that you actually "had to buy an annuity" as it was a choice you made given your circumstances and feelings. There was a time when everyone really had to buy an annuity. In my situation I'm in a long standing annuity contract anyway that's a result of how an old employer set up their retirement plan and there are restrictions on how I can get at my money. I'm only considering the lifetime annuity option because of the payout rate as I don't really need lifetime income.

westv

Bostonerimus1 said:

FIREDreamer said:

Bostonerimus1 said:

FIREDreamer said:

Bostonerimus1 said:

FIREDreamer said:

dunstonh said:

Using an IFA might have taken longer and mean that my annuity would have been lower due to rates going down.

Although, it may have been higher?  Did you get the computer rate or did HL ring Just to get the uplifted rate?

The computer rate off the website was something like £24,100 which I was happy with. It took ages for the funds to go to Just as it kept bouncing back (return date matched the send date so no interest lost) as Hargreaves got the reference number wrong twice. When it did go through I found that the annuity had gone up a bit so I was happy with that.

As rates have come down since then I think the timing was good and if I had gone with an IFA it could have taken longer and the rate might more likely to been lower as a result.

I was able to answer health questions on the web site but whilst it did impact all the other providers it made no difference with Just (same rate with or without health questions - i have a login with health declaration and another without to do a comparison) who were higher anyway.

I might use an IFA if I buy an annuity with the rest of the pot in the future though. Annuity rates might have stabilised by then and we would also be older.

I'm generally against annuities for anything other than providing a bare minimum of income you need to survive as they are expensive and will probably reduce the amount you can leave to heirs. They do offer longevity insurance and the certainty of a lifetime cheque and with rates higher than they have been for a while people will start to consider them again, but make sure you understand the fees and costs and I'd keep most of your money liquid in stocks, bonds, cash etc and do drawdown for it's low cost, flexibility, potential investment returns and to pass money onto children and charities etc.

I used approx 70% of my drawdown pot to buy an annuity. This leaves £300k in drawdown plus another maybe £50k to crystallise once I retire in June.

Also have over £600k in an ISA fully invested in a portfolio of investment trusts yielding over 4%. The dividends plus £20k subscriptions are just reinvested. I might tidy this up this year and just go for global trackers like HMWO / VWRL for simplicity.

That’s enough in investments so I was happy to take an annuity.

I got a rate of about 3.8% joint life RPI with a 10 year guarantee for ages 59/58.

That purchase money (the post crystallisation gain anyway) has also been removed from any potential LTA charge should that be reintroduced in the future.

My wife isn’t going to be interested in investments so again the “needs and requirements” are covered. The drawdown can go to luxuries. Unless the tax thresholds move soon, the annuity plus db plus state pension will use up my basic rate tax and I will not drawdown at 40% tax! That can be inherited.

You've made choices applicable to your circumstances. I think the hostility to annuities comes from a purely financial return perspective and with the attitude that markets will always deliver robust returns. The "absolutely never" folks don't consider the psychology or personal circumstances of many retirees. Of course annuities also rely on market returns, but the buyer is insulated from market fluctuations by their policy. I'm a big advocate for diversity in income generation and how much annuity/DB/SP vs drawdown is a very personal decision, but my inclination is to cover essentials with guaranteed income and as I'm single I don't need to consider a spouse which is a big factor.

I had to buy an annuity because if I just relied on drawdown plus 2 db then I would have been stuck in one more year syndrome and being to afraid to retire. Buying the annuity has given me the confidence to hand in my notice and retire in June. That, to me, is priceless. 😀

I'm not sure that you actually "had to buy an annuity" as it was a choice you made given your circumstances and feelings. There was a time when everyone really had to buy an annuity. In my situation I'm in a long standing annuity contract anyway that's a result of how an old employer set up their retirement plan and there are restrictions on how I can get at my money. I'm only considering the lifetime annuity option because of the payout rate as I don't really need lifetime income.

"Had to" doesn't always imply there was no option. 
"I just had to book that wonderful holiday" for example.

Bostonerimus1

westv said:

Bostonerimus1 said:

FIREDreamer said:

Bostonerimus1 said:

FIREDreamer said:

Bostonerimus1 said:

FIREDreamer said:

dunstonh said:

Using an IFA might have taken longer and mean that my annuity would have been lower due to rates going down.

Although, it may have been higher?  Did you get the computer rate or did HL ring Just to get the uplifted rate?

The computer rate off the website was something like £24,100 which I was happy with. It took ages for the funds to go to Just as it kept bouncing back (return date matched the send date so no interest lost) as Hargreaves got the reference number wrong twice. When it did go through I found that the annuity had gone up a bit so I was happy with that.

As rates have come down since then I think the timing was good and if I had gone with an IFA it could have taken longer and the rate might more likely to been lower as a result.

I was able to answer health questions on the web site but whilst it did impact all the other providers it made no difference with Just (same rate with or without health questions - i have a login with health declaration and another without to do a comparison) who were higher anyway.

I might use an IFA if I buy an annuity with the rest of the pot in the future though. Annuity rates might have stabilised by then and we would also be older.

I'm generally against annuities for anything other than providing a bare minimum of income you need to survive as they are expensive and will probably reduce the amount you can leave to heirs. They do offer longevity insurance and the certainty of a lifetime cheque and with rates higher than they have been for a while people will start to consider them again, but make sure you understand the fees and costs and I'd keep most of your money liquid in stocks, bonds, cash etc and do drawdown for it's low cost, flexibility, potential investment returns and to pass money onto children and charities etc.

I used approx 70% of my drawdown pot to buy an annuity. This leaves £300k in drawdown plus another maybe £50k to crystallise once I retire in June.

Also have over £600k in an ISA fully invested in a portfolio of investment trusts yielding over 4%. The dividends plus £20k subscriptions are just reinvested. I might tidy this up this year and just go for global trackers like HMWO / VWRL for simplicity.

That’s enough in investments so I was happy to take an annuity.

I got a rate of about 3.8% joint life RPI with a 10 year guarantee for ages 59/58.

That purchase money (the post crystallisation gain anyway) has also been removed from any potential LTA charge should that be reintroduced in the future.

My wife isn’t going to be interested in investments so again the “needs and requirements” are covered. The drawdown can go to luxuries. Unless the tax thresholds move soon, the annuity plus db plus state pension will use up my basic rate tax and I will not drawdown at 40% tax! That can be inherited.

You've made choices applicable to your circumstances. I think the hostility to annuities comes from a purely financial return perspective and with the attitude that markets will always deliver robust returns. The "absolutely never" folks don't consider the psychology or personal circumstances of many retirees. Of course annuities also rely on market returns, but the buyer is insulated from market fluctuations by their policy. I'm a big advocate for diversity in income generation and how much annuity/DB/SP vs drawdown is a very personal decision, but my inclination is to cover essentials with guaranteed income and as I'm single I don't need to consider a spouse which is a big factor.

I had to buy an annuity because if I just relied on drawdown plus 2 db then I would have been stuck in one more year syndrome and being to afraid to retire. Buying the annuity has given me the confidence to hand in my notice and retire in June. That, to me, is priceless. 😀

I'm not sure that you actually "had to buy an annuity" as it was a choice you made given your circumstances and feelings. There was a time when everyone really had to buy an annuity. In my situation I'm in a long standing annuity contract anyway that's a result of how an old employer set up their retirement plan and there are restrictions on how I can get at my money. I'm only considering the lifetime annuity option because of the payout rate as I don't really need lifetime income.

"Had to" doesn't always imply there was no option. 
"I just had to book that wonderful holiday" for example.

Yes the term can be taken in different ways, it's just that historically people had no choice other than to take an annuity. With the annuity becoming more popular now that rates are higher it's important to be accurate and understand exactly what you are buying and why. I looked at the OP's joint lifetime annuity and assuming 3% inflation (a big assumption) and that someone dies at 84 and the other spouse at 91 (ie joint life expectancy for a couple aged 59/58) an income stream starting with 25499 in the first year from a 645000 lump sum payment is an Internal Rate of Return of 3.46%.

LHW99

I think there is definately a case for annuity purchase once you approach late 70's, just to ensure that mental decline doesn't cause difficulties in accessing sufficient funds, even for those who up till then have been happy to fund themselves completely from drawdown.

Its also of benefit if a surviving partner has minimal interest / understanding of drawdown.

OldScientist

Bostonerimus1 said:

westv said:

Bostonerimus1 said:

FIREDreamer said:

Bostonerimus1 said:

FIREDreamer said:

Bostonerimus1 said:

FIREDreamer said:

dunstonh said:

Using an IFA might have taken longer and mean that my annuity would have been lower due to rates going down.

Although, it may have been higher?  Did you get the computer rate or did HL ring Just to get the uplifted rate?

The computer rate off the website was something like £24,100 which I was happy with. It took ages for the funds to go to Just as it kept bouncing back (return date matched the send date so no interest lost) as Hargreaves got the reference number wrong twice. When it did go through I found that the annuity had gone up a bit so I was happy with that.

As rates have come down since then I think the timing was good and if I had gone with an IFA it could have taken longer and the rate might more likely to been lower as a result.

I was able to answer health questions on the web site but whilst it did impact all the other providers it made no difference with Just (same rate with or without health questions - i have a login with health declaration and another without to do a comparison) who were higher anyway.

I might use an IFA if I buy an annuity with the rest of the pot in the future though. Annuity rates might have stabilised by then and we would also be older.

I'm generally against annuities for anything other than providing a bare minimum of income you need to survive as they are expensive and will probably reduce the amount you can leave to heirs. They do offer longevity insurance and the certainty of a lifetime cheque and with rates higher than they have been for a while people will start to consider them again, but make sure you understand the fees and costs and I'd keep most of your money liquid in stocks, bonds, cash etc and do drawdown for it's low cost, flexibility, potential investment returns and to pass money onto children and charities etc.

I used approx 70% of my drawdown pot to buy an annuity. This leaves £300k in drawdown plus another maybe £50k to crystallise once I retire in June.

Also have over £600k in an ISA fully invested in a portfolio of investment trusts yielding over 4%. The dividends plus £20k subscriptions are just reinvested. I might tidy this up this year and just go for global trackers like HMWO / VWRL for simplicity.

That’s enough in investments so I was happy to take an annuity.

I got a rate of about 3.8% joint life RPI with a 10 year guarantee for ages 59/58.

That purchase money (the post crystallisation gain anyway) has also been removed from any potential LTA charge should that be reintroduced in the future.

My wife isn’t going to be interested in investments so again the “needs and requirements” are covered. The drawdown can go to luxuries. Unless the tax thresholds move soon, the annuity plus db plus state pension will use up my basic rate tax and I will not drawdown at 40% tax! That can be inherited.

You've made choices applicable to your circumstances. I think the hostility to annuities comes from a purely financial return perspective and with the attitude that markets will always deliver robust returns. The "absolutely never" folks don't consider the psychology or personal circumstances of many retirees. Of course annuities also rely on market returns, but the buyer is insulated from market fluctuations by their policy. I'm a big advocate for diversity in income generation and how much annuity/DB/SP vs drawdown is a very personal decision, but my inclination is to cover essentials with guaranteed income and as I'm single I don't need to consider a spouse which is a big factor.

I had to buy an annuity because if I just relied on drawdown plus 2 db then I would have been stuck in one more year syndrome and being to afraid to retire. Buying the annuity has given me the confidence to hand in my notice and retire in June. That, to me, is priceless. 😀

I'm not sure that you actually "had to buy an annuity" as it was a choice you made given your circumstances and feelings. There was a time when everyone really had to buy an annuity. In my situation I'm in a long standing annuity contract anyway that's a result of how an old employer set up their retirement plan and there are restrictions on how I can get at my money. I'm only considering the lifetime annuity option because of the payout rate as I don't really need lifetime income.

"Had to" doesn't always imply there was no option. 
"I just had to book that wonderful holiday" for example.

Yes the term can be taken in different ways, it's just that historically people had no choice other than to take an annuity. With the annuity becoming more popular now that rates are higher it's important to be accurate and understand exactly what you are buying and why. I looked at the OP's joint lifetime annuity and assuming 3% inflation (a big assumption) and that someone dies at 84 and the other spouse at 91 (ie joint life expectancy for a couple aged 59/58) an income stream starting with 25499 in the first year from a 645000 lump sum payment is an Internal Rate of Return of 3.46%.

That's an IRR in real terms of about 0.5%, which, not surprisingly, is close enough to the real yields on inflation linked gilts.

I think the point is that there are a lot of different tools in the retirement finance toolbox that each have different characteristics. I fully agree that those different characteristics need to be understood and compared so that how they might fit into a particular retirement plan can also be understood. For example, the contents of a DC pension could be spent on
1) Drawdown from a portfolio of stocks and bonds. This has market, inflation, and longevity risks (the bonds also have default risk), but is generally good for a legacy (particular in the event of early death - the legacy after a late death depends on the market). It also requires sufficient cognitive function to organise withdrawals (although this can be automated to some extent) and portfolio management.
2) RPI annuity. This has no market, inflation or longevity risk (but still has insurance company risk, partly offset by the FSCS, and default risk), but is not good for a legacy in the event of an early death - while if there is remaining portfolio after purchase, then late death legacies may be higher than drawdown only. Once set up, no input is required from the annuitant.

Currently, the income rate for a joint RPI annuity at 65 (~3.7% depending on beneficiary payments) is a little higher than the historical 'safe' withdrawal rate for the UK (~3.0 to 3.5% for a 30 year retirement and 60/40 portfolio) which makes the use of such an annuity attractive.

A mixed approach allows some advantages to be gained from the strengths of each type of instrument. For example, with an RPI annuity and state pension (and DB pensions) covering a significant proportion of expenditure, the portfolio can be invested more aggressively (i.e., more stocks) while portfolio withdrawals can either be front loaded (to fund the early years of retirement), more flexible (i.e., allowed vary with the market so the risk of premature exhaustion is reduced) or even be zero (which allows a legacy to be built up).

The annuity puzzle (i.e., why, when there is a choice, relatively few annuities are purchased) has been puzzled over for  getting on for at least 40 years without (AFAIK) a clear unambiguous explanation being found. In the UK, there was a significant drop in annuity purchases after the so-called pension freedoms (e.g., see https://committees.parliament.uk/publications/8514/documents/86189/default/ ) but this also coincided with record low yields in gilts - it will be interesting to see whether this has increased again as yields (and annuity rates) have increased over the last 18 months or so. Anecdotal evidence from MSE suggests that there has been more interest and discussion over that period.

Qyburn

OldScientist said:

The annuity puzzle (i.e., why, when there is a choice, relatively few annuities are purchased) has been puzzled over for  getting on for at least 40 years without (AFAIK) a clear unambiguous explanation being found. 

Not sure what would have been puzzled over 40 years ago, when private pensions didn't even exist, and over 30 years before there was any choice.

OldScientist said:

In the UK, there was a significant drop in annuity purchases after the so-called pension freedoms 

Really no surprise there, annuity purchases reducing when no longer compulsory.

FIREDreamer

Qyburn said:

OldScientist said:

The annuity puzzle (i.e., why, when there is a choice, relatively few annuities are purchased) has been puzzled over for  getting on for at least 40 years without (AFAIK) a clear unambiguous explanation being found. 

Not sure what would have been puzzled over 40 years ago, when private pensions didn't even exist, and over 30 years before there was any choice.

OldScientist said:

In the UK, there was a significant drop in annuity purchases after the so-called pension freedoms 

Really no surprise there, annuity purchases reducing when no longer compulsory.

.. and purchases presumably started increasing when they are close to SWR but without the sleepless nights!

Bostonerimus1

OldScientist said:

Bostonerimus1 said:

westv said:

Bostonerimus1 said:

FIREDreamer said:

Bostonerimus1 said:

FIREDreamer said:

Bostonerimus1 said:

FIREDreamer said:

dunstonh said:

Using an IFA might have taken longer and mean that my annuity would have been lower due to rates going down.

Although, it may have been higher?  Did you get the computer rate or did HL ring Just to get the uplifted rate?

The computer rate off the website was something like £24,100 which I was happy with. It took ages for the funds to go to Just as it kept bouncing back (return date matched the send date so no interest lost) as Hargreaves got the reference number wrong twice. When it did go through I found that the annuity had gone up a bit so I was happy with that.

As rates have come down since then I think the timing was good and if I had gone with an IFA it could have taken longer and the rate might more likely to been lower as a result.

I was able to answer health questions on the web site but whilst it did impact all the other providers it made no difference with Just (same rate with or without health questions - i have a login with health declaration and another without to do a comparison) who were higher anyway.

I might use an IFA if I buy an annuity with the rest of the pot in the future though. Annuity rates might have stabilised by then and we would also be older.

I'm generally against annuities for anything other than providing a bare minimum of income you need to survive as they are expensive and will probably reduce the amount you can leave to heirs. They do offer longevity insurance and the certainty of a lifetime cheque and with rates higher than they have been for a while people will start to consider them again, but make sure you understand the fees and costs and I'd keep most of your money liquid in stocks, bonds, cash etc and do drawdown for it's low cost, flexibility, potential investment returns and to pass money onto children and charities etc.

I used approx 70% of my drawdown pot to buy an annuity. This leaves £300k in drawdown plus another maybe £50k to crystallise once I retire in June.

Also have over £600k in an ISA fully invested in a portfolio of investment trusts yielding over 4%. The dividends plus £20k subscriptions are just reinvested. I might tidy this up this year and just go for global trackers like HMWO / VWRL for simplicity.

That’s enough in investments so I was happy to take an annuity.

I got a rate of about 3.8% joint life RPI with a 10 year guarantee for ages 59/58.

That purchase money (the post crystallisation gain anyway) has also been removed from any potential LTA charge should that be reintroduced in the future.

My wife isn’t going to be interested in investments so again the “needs and requirements” are covered. The drawdown can go to luxuries. Unless the tax thresholds move soon, the annuity plus db plus state pension will use up my basic rate tax and I will not drawdown at 40% tax! That can be inherited.

You've made choices applicable to your circumstances. I think the hostility to annuities comes from a purely financial return perspective and with the attitude that markets will always deliver robust returns. The "absolutely never" folks don't consider the psychology or personal circumstances of many retirees. Of course annuities also rely on market returns, but the buyer is insulated from market fluctuations by their policy. I'm a big advocate for diversity in income generation and how much annuity/DB/SP vs drawdown is a very personal decision, but my inclination is to cover essentials with guaranteed income and as I'm single I don't need to consider a spouse which is a big factor.

I had to buy an annuity because if I just relied on drawdown plus 2 db then I would have been stuck in one more year syndrome and being to afraid to retire. Buying the annuity has given me the confidence to hand in my notice and retire in June. That, to me, is priceless. 😀

I'm not sure that you actually "had to buy an annuity" as it was a choice you made given your circumstances and feelings. There was a time when everyone really had to buy an annuity. In my situation I'm in a long standing annuity contract anyway that's a result of how an old employer set up their retirement plan and there are restrictions on how I can get at my money. I'm only considering the lifetime annuity option because of the payout rate as I don't really need lifetime income.

"Had to" doesn't always imply there was no option. 
"I just had to book that wonderful holiday" for example.

Yes the term can be taken in different ways, it's just that historically people had no choice other than to take an annuity. With the annuity becoming more popular now that rates are higher it's important to be accurate and understand exactly what you are buying and why. I looked at the OP's joint lifetime annuity and assuming 3% inflation (a big assumption) and that someone dies at 84 and the other spouse at 91 (ie joint life expectancy for a couple aged 59/58) an income stream starting with 25499 in the first year from a 645000 lump sum payment is an Internal Rate of Return of 3.46%.

That's an IRR in real terms of about 0.5%, which, not surprisingly, is close enough to the real yields on inflation linked gilts.

I think the point is that there are a lot of different tools in the retirement finance toolbox that each have different characteristics. I fully agree that those different characteristics need to be understood and compared so that how they might fit into a particular retirement plan can also be understood. For example, the contents of a DC pension could be spent on
1) Drawdown from a portfolio of stocks and bonds. This has market, inflation, and longevity risks (the bonds also have default risk), but is generally good for a legacy (particular in the event of early death - the legacy after a late death depends on the market). It also requires sufficient cognitive function to organise withdrawals (although this can be automated to some extent) and portfolio management.
2) RPI annuity. This has no market, inflation or longevity risk (but still has insurance company risk, partly offset by the FSCS, and default risk), but is not good for a legacy in the event of an early death - while if there is remaining portfolio after purchase, then late death legacies may be higher than drawdown only. Once set up, no input is required from the annuitant.

Currently, the income rate for a joint RPI annuity at 65 (~3.7% depending on beneficiary payments) is a little higher than the historical 'safe' withdrawal rate for the UK (~3.0 to 3.5% for a 30 year retirement and 60/40 portfolio) which makes the use of such an annuity attractive.

A mixed approach allows some advantages to be gained from the strengths of each type of instrument. For example, with an RPI annuity and state pension (and DB pensions) covering a significant proportion of expenditure, the portfolio can be invested more aggressively (i.e., more stocks) while portfolio withdrawals can either be front loaded (to fund the early years of retirement), more flexible (i.e., allowed vary with the market so the risk of premature exhaustion is reduced) or even be zero (which allows a legacy to be built up).

The annuity puzzle (i.e., why, when there is a choice, relatively few annuities are purchased) has been puzzled over for  getting on for at least 40 years without (AFAIK) a clear unambiguous explanation being found. In the UK, there was a significant drop in annuity purchases after the so-called pension freedoms (e.g., see https://committees.parliament.uk/publications/8514/documents/86189/default/ ) but this also coincided with record low yields in gilts - it will be interesting to see whether this has increased again as yields (and annuity rates) have increased over the last 18 months or so. Anecdotal evidence from MSE suggests that there has been more interest and discussion over that period.

I very much agree with all that OldScientist has said. The prevailing wisdom in retirement research is if you buy an annuity do it with the bond allocation in your DC portfolio so you have a stock heavy remaining portfolio to provide growth. I have a DB pension and SPs to come that will cover my expenses and I feel ok with having 90% of my remaining investments in equity index funds. So, I would normally not buy an annuity except that my insurance company quoted me an annuity with a 10 year guarantee, no RPI, with an IRR of 7.5% if I live to 83.

Bostonerimus1

LHW99 said:

I think there is definately a case for annuity purchase once you approach late 70's, just to ensure that mental decline doesn't cause difficulties in accessing sufficient funds, even for those who up till then have been happy to fund themselves completely from drawdown.

Its also of benefit if a surviving partner has minimal interest / understanding of drawdown.

It's wrong to think of an annuity as an investment. As you say they are a retirement income tool that can be appropriate in some circumstances. They provide longevity insurance and, if they have an RPI, also inflation linking and a simple way to get retirement income. But you pay for all those features.

FIREDreamer

Bostonerimus1 said:

OldScientist said:

Bostonerimus1 said:

westv said:

Bostonerimus1 said:

FIREDreamer said:

Bostonerimus1 said:

FIREDreamer said:

Bostonerimus1 said:

FIREDreamer said:

dunstonh said:

Using an IFA might have taken longer and mean that my annuity would have been lower due to rates going down.

Although, it may have been higher?  Did you get the computer rate or did HL ring Just to get the uplifted rate?

The computer rate off the website was something like £24,100 which I was happy with. It took ages for the funds to go to Just as it kept bouncing back (return date matched the send date so no interest lost) as Hargreaves got the reference number wrong twice. When it did go through I found that the annuity had gone up a bit so I was happy with that.

As rates have come down since then I think the timing was good and if I had gone with an IFA it could have taken longer and the rate might more likely to been lower as a result.

I was able to answer health questions on the web site but whilst it did impact all the other providers it made no difference with Just (same rate with or without health questions - i have a login with health declaration and another without to do a comparison) who were higher anyway.

I might use an IFA if I buy an annuity with the rest of the pot in the future though. Annuity rates might have stabilised by then and we would also be older.

I'm generally against annuities for anything other than providing a bare minimum of income you need to survive as they are expensive and will probably reduce the amount you can leave to heirs. They do offer longevity insurance and the certainty of a lifetime cheque and with rates higher than they have been for a while people will start to consider them again, but make sure you understand the fees and costs and I'd keep most of your money liquid in stocks, bonds, cash etc and do drawdown for it's low cost, flexibility, potential investment returns and to pass money onto children and charities etc.

I used approx 70% of my drawdown pot to buy an annuity. This leaves £300k in drawdown plus another maybe £50k to crystallise once I retire in June.

Also have over £600k in an ISA fully invested in a portfolio of investment trusts yielding over 4%. The dividends plus £20k subscriptions are just reinvested. I might tidy this up this year and just go for global trackers like HMWO / VWRL for simplicity.

That’s enough in investments so I was happy to take an annuity.

I got a rate of about 3.8% joint life RPI with a 10 year guarantee for ages 59/58.

That purchase money (the post crystallisation gain anyway) has also been removed from any potential LTA charge should that be reintroduced in the future.

My wife isn’t going to be interested in investments so again the “needs and requirements” are covered. The drawdown can go to luxuries. Unless the tax thresholds move soon, the annuity plus db plus state pension will use up my basic rate tax and I will not drawdown at 40% tax! That can be inherited.

You've made choices applicable to your circumstances. I think the hostility to annuities comes from a purely financial return perspective and with the attitude that markets will always deliver robust returns. The "absolutely never" folks don't consider the psychology or personal circumstances of many retirees. Of course annuities also rely on market returns, but the buyer is insulated from market fluctuations by their policy. I'm a big advocate for diversity in income generation and how much annuity/DB/SP vs drawdown is a very personal decision, but my inclination is to cover essentials with guaranteed income and as I'm single I don't need to consider a spouse which is a big factor.

I had to buy an annuity because if I just relied on drawdown plus 2 db then I would have been stuck in one more year syndrome and being to afraid to retire. Buying the annuity has given me the confidence to hand in my notice and retire in June. That, to me, is priceless. 😀

I'm not sure that you actually "had to buy an annuity" as it was a choice you made given your circumstances and feelings. There was a time when everyone really had to buy an annuity. In my situation I'm in a long standing annuity contract anyway that's a result of how an old employer set up their retirement plan and there are restrictions on how I can get at my money. I'm only considering the lifetime annuity option because of the payout rate as I don't really need lifetime income.

"Had to" doesn't always imply there was no option. 
"I just had to book that wonderful holiday" for example.

Yes the term can be taken in different ways, it's just that historically people had no choice other than to take an annuity. With the annuity becoming more popular now that rates are higher it's important to be accurate and understand exactly what you are buying and why. I looked at the OP's joint lifetime annuity and assuming 3% inflation (a big assumption) and that someone dies at 84 and the other spouse at 91 (ie joint life expectancy for a couple aged 59/58) an income stream starting with 25499 in the first year from a 645000 lump sum payment is an Internal Rate of Return of 3.46%.

That's an IRR in real terms of about 0.5%, which, not surprisingly, is close enough to the real yields on inflation linked gilts.

I think the point is that there are a lot of different tools in the retirement finance toolbox that each have different characteristics. I fully agree that those different characteristics need to be understood and compared so that how they might fit into a particular retirement plan can also be understood. For example, the contents of a DC pension could be spent on
1) Drawdown from a portfolio of stocks and bonds. This has market, inflation, and longevity risks (the bonds also have default risk), but is generally good for a legacy (particular in the event of early death - the legacy after a late death depends on the market). It also requires sufficient cognitive function to organise withdrawals (although this can be automated to some extent) and portfolio management.
2) RPI annuity. This has no market, inflation or longevity risk (but still has insurance company risk, partly offset by the FSCS, and default risk), but is not good for a legacy in the event of an early death - while if there is remaining portfolio after purchase, then late death legacies may be higher than drawdown only. Once set up, no input is required from the annuitant.

Currently, the income rate for a joint RPI annuity at 65 (~3.7% depending on beneficiary payments) is a little higher than the historical 'safe' withdrawal rate for the UK (~3.0 to 3.5% for a 30 year retirement and 60/40 portfolio) which makes the use of such an annuity attractive.

A mixed approach allows some advantages to be gained from the strengths of each type of instrument. For example, with an RPI annuity and state pension (and DB pensions) covering a significant proportion of expenditure, the portfolio can be invested more aggressively (i.e., more stocks) while portfolio withdrawals can either be front loaded (to fund the early years of retirement), more flexible (i.e., allowed vary with the market so the risk of premature exhaustion is reduced) or even be zero (which allows a legacy to be built up).

The annuity puzzle (i.e., why, when there is a choice, relatively few annuities are purchased) has been puzzled over for  getting on for at least 40 years without (AFAIK) a clear unambiguous explanation being found. In the UK, there was a significant drop in annuity purchases after the so-called pension freedoms (e.g., see https://committees.parliament.uk/publications/8514/documents/86189/default/ ) but this also coincided with record low yields in gilts - it will be interesting to see whether this has increased again as yields (and annuity rates) have increased over the last 18 months or so. Anecdotal evidence from MSE suggests that there has been more interest and discussion over that period.

I very much agree with all that OldScientist has said. The prevailing wisdom in retirement research is if you buy an annuity do it with the bond allocation in your DC portfolio so you have a stock heavy remaining portfolio to provide growth. I have a DB pension and SPs to come that will cover my expenses and I feel ok with having 90% of my remaining investments in equity index funds. So, I would normally not buy an annuity except that my insurance company quoted me an annuity with a 10 year guarantee, no RPI, with an IRR of 7.5% if I live to 83.

If I value my annuity as a bond investment based on its purchase price, DB using the LTA multiple of 20, and the rest of my assets as they are (mortgage free home excluded), I have

Bonds (Annuity plus DB) 45%
Global Equities (SIPP) 15% - I doubt any of this will be drawn down
Global Equities (ISA) 30%
Cash (Premium Bonds, Fixed Rate Accounts, NSI IL Savings certificates) 10%

The Bonds will be drip fed into equities as any pension that isn’t spent, plus some of the cash, will be fed into equities in my ISA.

I don’t think that is too bad at age 59.

Fully owned house excluded.