Just can't decide between Drawdown, lifetime or fixed term annuity!

OldScientist

epsilon4900 said:

Thanks Marcon! Yes I have pretty much ruled out drawdown. I wish it felt right for me as others on these forums seem to do very well with it but I doubt I have either the skills or knowledge for it nor the interest in putting that sort of work in. That probably sounds very complacent but it is honest. I am 61 soon to be 62. I have three pension pots. I want to leave one alone for at least another 5 years as it is accruing steadily or has been. It has around 54 k in it at the moment and I don't contribute. Can't according to the rules as it has been paid up for too long? More than 25 years. All are direct contribution. I want to combine two to make a value of 58 k and take a tfls.  I do have some equity in a property so I could sell that if I needed to fund care and I have some separate savings too. I am thinking that over the next 5 years till OAP pension if I make it to 67 the extra amount of a fixed term annuity would be very welcome.

Just a few things you might want to consider (no actual answers, sorry)

1) Longevity. Current predictions are that at 62, 25% of males will live to 92 (i.e. another 30 years), 10% to 97 (i.e., 35 years), and 3% to 100 (i.e. 38 years) - females are likely to live slightly longer (see https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 , but note that these figures are for the whole population).

2) Are you single or not? If you aren't single, do you need to make provision for your spouse/partner?

3) Do you want to leave a legacy (whether to offspring or charity)? You can do this from your income or after death.

4) What other sources of income do you have apart from state pension (in due course) and from these pension pots?

5) In the long-term can you survive on state pension and other sources of income only? In other words, what are the consequences if the additional income runs out.

In terms of comparing products, purely from the amount of real cash delivered:
1) If you live a long time, a lifetime annuity will turn out to have been the best option.
2) If you live a short time, a fixed term annuity may have been best
3) If inflation is low (e.g., close to the 2% target), then it is likely that a level (fixed nominal) annuity (whether lifetime or term) will have been the best option
4) If inflation is high, then an RPI annuity will have been best.

Note the 'will have been' tense in those statements - it is impossible to predict what will happen beforehand. What you need to determine is what would happen to your retirement if a particular risk turns up.

For example, if you choose a fixed term annuity (with no cash sum at end) and you live longer than the term, then would you be able to manage with only your state pension and any other sources of income (Consideration 5 in the list above).

Another example, if you choose a level annuity and annual inflation is 10% for the a 5 year period, then, in real terms, your income will have fallen by about 40% of the initial value). Even relatively low inflation of 3% operating over a 20 years will reduce a nominal income by 45% in real terms. Again, what are the consequences for you?

You can visualise this by writing down the various outcomes and consequences on a piece of paper. It is likely that some 'bad' consequences will be more acceptable to you than others will be - hopefully, this will enable you to make a decision based on your own circumstances and requirements.

epsilon4900

OldScientist said:

epsilon4900 said:

Thanks Marcon! Yes I have pretty much ruled out drawdown. I wish it felt right for me as others on these forums seem to do very well with it but I doubt I have either the skills or knowledge for it nor the interest in putting that sort of work in. That probably sounds very complacent but it is honest. I am 61 soon to be 62. I have three pension pots. I want to leave one alone for at least another 5 years as it is accruing steadily or has been. It has around 54 k in it at the moment and I don't contribute. Can't according to the rules as it has been paid up for too long? More than 25 years. All are direct contribution. I want to combine two to make a value of 58 k and take a tfls.  I do have some equity in a property so I could sell that if I needed to fund care and I have some separate savings too. I am thinking that over the next 5 years till OAP pension if I make it to 67 the extra amount of a fixed term annuity would be very welcome.

Just a few things you might want to consider (no actual answers, sorry)

1) Longevity. Current predictions are that at 62, 25% of males will live to 92 (i.e. another 30 years), 10% to 97 (i.e., 35 years), and 3% to 100 (i.e. 38 years) - females are likely to live slightly longer (see https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 , but note that these figures are for the whole population).

2) Are you single or not? If you aren't single, do you need to make provision for your spouse/partner?

3) Do you want to leave a legacy (whether to offspring or charity)? You can do this from your income or after death.

4) What other sources of income do you have apart from state pension (in due course) and from these pension pots?

5) In the long-term can you survive on state pension and other sources of income only? In other words, what are the consequences if the additional income runs out.

In terms of comparing products, purely from the amount of real cash delivered:
1) If you live a long time, a lifetime annuity will turn out to have been the best option.
2) If you live a short time, a fixed term annuity may have been best
3) If inflation is low (e.g., close to the 2% target), then it is likely that a level (fixed nominal) annuity (whether lifetime or term) will have been the best option
4) If inflation is high, then an RPI annuity will have been best.

Note the 'will have been' tense in those statements - it is impossible to predict what will happen beforehand. What you need to determine is what would happen to your retirement if a particular risk turns up.

For example, if you choose a fixed term annuity (with no cash sum at end) and you live longer than the term, then would you be able to manage with only your state pension and any other sources of income (Consideration 5 in the list above).

Another example, if you choose a level annuity and annual inflation is 10% for the a 5 year period, then, in real terms, your income will have fallen by about 40% of the initial value). Even relatively low inflation of 3% operating over a 20 years will reduce a nominal income by 45% in real terms. Again, what are the consequences for you?

You can visualise this by writing down the various outcomes and consequences on a piece of paper. It is likely that some 'bad' consequences will be more acceptable to you than others will be - hopefully, this will enable you to make a decision based on your own circumstances and requirements.

Thanks!

My Mum died at 90 and a quarter and my Dad at just 83. I'm  hoping this may give me till my 80s at least barring unforeseen circumstances? So 20 years for an annuity feels about the best to hope for.
Single but not providing for a partner as the significant person in my life is older than I am.
My will is already sorted for relatives and charity and so on..
Leaving my 3rd pension pot alone for at least another 5 years or possibly more. It has 54K at present and I am hoping it will continue to grow by £2k a year as it has in recent years.
I have significant savings which are currently just in savings accounts. I plan to leave those in savings accounts and live off the interest and then at an unspecified time start to spend the capital. I can't take it with me right?
I have a tiny amount of superann coming my way very soon and then the state pension all being well in 5 years. I reckon I should be able to manage by leaving the 3rd pension alone as long as possible. Thanks for your clarity and level headedness here Old Scientist. My big focus now is on getting to the state pension maintaining my current hardly profligate or sybaritic lifestyle BUT to gradually wind down my self employment and bump up my non work time and so on. Possibly look at alternative work options for this next chapter but I won't discuss that here as it doesn't feel relevant.

epsilon4900

I've made a decision! I am going to raid the pot with the least in it and start doing that this summer. I shall leave the two other pots alone and continue to put money in to one of them. I think that works. So I shall be researching the best drawdown account into which to transfer this paltry sum and begin to take it as far as the tax threshold and tax free lump sum option/s permit. Any advice on which companies are very good for very small pots in drawdown and / or whom to avoid? Any tips at all on this gratefully received. Thanks!

xylophone

How much is in this "very small pot" - is it £10,000 or under?

If not, and if you intend to take out anything over the PCLS, don't forget to consider the MPAA.

See

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

There are special rules if you want to cash in a number of small pension pots valued at less than £10,000, so it’s important to check with your provider that it will be treated as taken under the small pot lump sum rules. Otherwise, there’s a risk the MPAA will be triggered. 

epsilon4900

xylophone said:

How much is in this "very small pot" - is it £10,000 or under?

If not, and if you intend to take out anything over the PCLS, don't forget to consider the MPAA.

See

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

There are special rules if you want to cash in a number of small pension pots valued at less than £10,000, so it’s important to check with your provider that it will be treated as taken under the small pot lump sum rules. Otherwise, there’s a risk the MPAA will be triggered. 

Thanks. It is just over the 10K so I don't think I can take it as a small pension pot alas.  I am aware of the MPAA but I can't imagine ever paying in as much as 10K to a pension. In fact I have never paid in such a sum either as a regular amount accrued over a year or as a lump sum.

Brie

epsilon4900 said:

xylophone said:

How much is in this "very small pot" - is it £10,000 or under?

If not, and if you intend to take out anything over the PCLS, don't forget to consider the MPAA.

See

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

There are special rules if you want to cash in a number of small pension pots valued at less than £10,000, so it’s important to check with your provider that it will be treated as taken under the small pot lump sum rules. Otherwise, there’s a risk the MPAA will be triggered. 

Thanks. It is just over the 10K so I don't think I can take it as a small pension pot alas.  I am aware of the MPAA but I can't imagine ever paying in as much as 10K to a pension. In fact I have never paid in such a sum either as a regular amount accrued over a year or as a lump sum.

Doesn't the MPAA include the employer's portion too?  

epsilon4900

Brie said:

epsilon4900 said:

xylophone said:

How much is in this "very small pot" - is it £10,000 or under?

If not, and if you intend to take out anything over the PCLS, don't forget to consider the MPAA.

See

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

There are special rules if you want to cash in a number of small pension pots valued at less than £10,000, so it’s important to check with your provider that it will be treated as taken under the small pot lump sum rules. Otherwise, there’s a risk the MPAA will be triggered. 

Thanks. It is just over the 10K so I don't think I can take it as a small pension pot alas.  I am aware of the MPAA but I can't imagine ever paying in as much as 10K to a pension. In fact I have never paid in such a sum either as a regular amount accrued over a year or as a lump sum.

Doesn't the MPAA include the employer's portion too?  

Ah thanks I didn't realize that BUT as I am self employed and unlikely to change that status before retirement I don't think it applies to me.