Better rate for bigger £ annuity?

arthur_fowler

I will retire at some point next year age 60 and intend to fund much of my retirement by a level rate 50% spouse annuity. 
I have two DC pots from different employments (current employer plus previous one). One will have around £240k in and the other around £500k.
I am thinking about buying one annuity earlier than the other so that I can use mine and Mrs F's 2024/25 ISA allowance for the TFLS before I retire (which will be no earlier than April).

Is there downside to buying two annuities rather than putting them together into a single one? i.e. might I get a better rate for a larger amount?
Thanks

Marcon

arthur_fowler said:

I will retire at some point next year age 60 and intend to fund much of my retirement by a level rate 50% spouse annuity. 
I have two DC pots from different employments (current employer plus previous one). One will have around £240k in and the other around £500k.
I am thinking about buying one annuity earlier than the other so that I can use mine and Mrs F's 2024/25 ISA allowance for the TFLS before I retire (which will be no earlier than April).

Is there downside to buying two annuities rather than putting them together into a single one? i.e. might I get a better rate for a larger amount?
Thanks

If you buy two different annuities, then you have two lots of administration fees to pay, which is why you're likely to get a better rate if you simply buy one.

The alternative might be to take just some tax free cash and use that to fund your ISAs, then use the balance(s) to buy one annuity?

arthur_fowler

Marcon said:

arthur_fowler said:

I will retire at some point next year age 60 and intend to fund much of my retirement by a level rate 50% spouse annuity. 
I have two DC pots from different employments (current employer plus previous one). One will have around £240k in and the other around £500k.
I am thinking about buying one annuity earlier than the other so that I can use mine and Mrs F's 2024/25 ISA allowance for the TFLS before I retire (which will be no earlier than April).

Is there downside to buying two annuities rather than putting them together into a single one? i.e. might I get a better rate for a larger amount?
Thanks

If you buy two different annuities, then you have two lots of administration fees to pay, which is why you're likely to get a better rate if you simply buy one.

The alternative might be to take just some tax free cash and use that to fund your ISAs, then use the balance(s) to buy one annuity?

Thanks, that's useful. 
I need to maximise the TFLS to keep me out of higher rate tax bracket for some years.

El_Torro

Generally speaking it's a good idea to take the 25% tax free lump sum and buy the annuity with the remaining amount. Reason being that you don't pay tax on the lump sum but any income you get from an annuity is taxable. 

It depends on what you're trying to achieve but looking at the pure numbers that's the way to go. 

arthur_fowler

El_Torro said:

Generally speaking it's a good idea to take the 25% tax free lump sum and buy the annuity with the remaining amount. Reason being that you don't pay tax on the lump sum but any income you get from an annuity is taxable. 

It depends on what you're trying to achieve but looking at the pure numbers that's the way to go. 

Yes, I appreciate that thanks. My question is how to deal with two DC pots. I will take 25% TFLS from each but would it be better to buy one big annuity or would the rate be the same for two smaller ones.

MK62

If you buy the two annuities at different times, they'll most likely be at different rates, so there's no way to know now whether that would be better than buying a single larger annuity at the later date.
In your current pension schemes, do you have to buy the annuity at the time you take enough TFLS to fund the ISAs? If so, then another option might be to transfer to a scheme which gives you that flexibility.

arthur_fowler

MK62 said:

If you buy the two annuities at different times, they'll most likely be at different rates, so there's no way to know now whether that would be better than buying a single larger annuity at the later date.
In your current pension schemes, do you have to buy the annuity at the time you take enough TFLS to fund the ISAs? If so, then another option might be to transfer to a scheme which gives you that flexibility.

Good idea. I will find out if that is an option.

LHW99

if you did buy two separate annuities, you could eg delay one for 10 years, whereby age could increase the amount. But that would depend on whether one could give you enough income for now.

FIREDreamer

I have some experience of annuity rate coding.

Larger pots will generally get a worse annuity rate than smaller pots (though there will be some adjustment for fixed initial fees and ongoing fees).

Whilst this may be counter intuitive - if you think about it, it makes sense.

People with larger pots will obviously be more affluent (having been able to save more) and will be deemed to be of a higher / healthier demographic with a higher life expectancy.

Of course it depends on the provider …

Level annuity, male 60, monthly in arrear with no guarantee period.

£100k purchase money



£1M purchase money

Look at Standard Life

£100k gets you £6,414.60 so £1M should get you ten times this, i.e. £64,146.00 but they only quote £63,880.92.

Other providers pay more than 10 times the £100k figure and others wont quote at all.

arthur_fowler

FIREDreamer said:

I have some experience of annuity rate coding.

Larger pots will generally get a worse annuity rate than smaller pots (though there will be some adjustment for fixed initial fees and ongoing fees).

Whilst this may be counter intuitive - if you think about it, it makes sense.

People with larger pots will obviously be more affluent (having been able to save more) and will be deemed to be of a higher / healthier demographic with a higher life expectancy.

Of course it depends on the provider …

Level annuity, male 60, monthly in arrear with no guarantee period.

£100k purchase money



£1M purchase money

Look at Standard Life

£100k gets you £6,414.60 so £1M should get you ten times this, i.e. £64,146.00 but they only quote £63,880.92.

Other providers pay more than 10 times the £100k figure and others wont quote at all.

Very interesting, thanks!

dunstonh

There are also some providers that allow you to buy an annuity within a flexible pension where the income is retained in the pension and not taxed as it is still in the pension.  You then draw the pension income flexibly.   Any unused annuity income can be reinvested or retained in cash.