Annuity - is this a stupid idea?

Dazed_and_C0nfused

najan49 said:

If you took £6,500 on day 1 of year 1 AJ Bell would pay just over £2k interest on the balance left for the rest of year 1.  

This is variable rate interest so other options might be better but not sure the annuity is the best one.

Not really comparing like with like, is it? With the 10 year annuity, you know exactly what you will get and how much it will cost. The only unknown is the value of the money after inflation. With your example you are also taking on interest rate risk.

IMO a more comparable example would be a UK gilt ladder, the calculator here https://lategenxer.streamlit.app/Gilt_Ladder says that to provide £5725 pa for 10 years (starting on 1st Sept) costs £48,977.28, which is very similar to the cost of the annuity at £48,750.

Appreciate the interest rate is variable and may well be less going forward but Gilts aren't my thing.

If you go with the Gilts suggestion what is left at the end of the 10 years?

MK62

Dazed_and_C0nfused said:

najan49 said:

If you took £6,500 on day 1 of year 1 AJ Bell would pay just over £2k interest on the balance left for the rest of year 1.  

This is variable rate interest so other options might be better but not sure the annuity is the best one.

Not really comparing like with like, is it? With the 10 year annuity, you know exactly what you will get and how much it will cost. The only unknown is the value of the money after inflation. With your example you are also taking on interest rate risk.

IMO a more comparable example would be a UK gilt ladder, the calculator here https://lategenxer.streamlit.app/Gilt_Ladder says that to provide £5725 pa for 10 years (starting on 1st Sept) costs £48,977.28, which is very similar to the cost of the annuity at £48,750.

Appreciate the interest rate is variable and may well be less going forward but Gilts aren't my thing.

If you go with the Gilts suggestion what is left at the end of the 10 years?

Nowt......

......well, apart from the original £16k tax free lump sum that is, but that's the same either way, annuity or gilt ladder.

Dazed_and_C0nfused

MK62 said:

Dazed_and_C0nfused said:

najan49 said:

If you took £6,500 on day 1 of year 1 AJ Bell would pay just over £2k interest on the balance left for the rest of year 1.  

This is variable rate interest so other options might be better but not sure the annuity is the best one.

Not really comparing like with like, is it? With the 10 year annuity, you know exactly what you will get and how much it will cost. The only unknown is the value of the money after inflation. With your example you are also taking on interest rate risk.

IMO a more comparable example would be a UK gilt ladder, the calculator here https://lategenxer.streamlit.app/Gilt_Ladder says that to provide £5725 pa for 10 years (starting on 1st Sept) costs £48,977.28, which is very similar to the cost of the annuity at £48,750.

Appreciate the interest rate is variable and may well be less going forward but Gilts aren't my thing.

If you go with the Gilts suggestion what is left at the end of the 10 years?

Nowt......

So you pay more to receive less overall 😳

MK62

Dazed_and_C0nfused said:

MK62 said:

Dazed_and_C0nfused said:

najan49 said:

If you took £6,500 on day 1 of year 1 AJ Bell would pay just over £2k interest on the balance left for the rest of year 1.  

This is variable rate interest so other options might be better but not sure the annuity is the best one.

Not really comparing like with like, is it? With the 10 year annuity, you know exactly what you will get and how much it will cost. The only unknown is the value of the money after inflation. With your example you are also taking on interest rate risk.

IMO a more comparable example would be a UK gilt ladder, the calculator here https://lategenxer.streamlit.app/Gilt_Ladder says that to provide £5725 pa for 10 years (starting on 1st Sept) costs £48,977.28, which is very similar to the cost of the annuity at £48,750.

Appreciate the interest rate is variable and may well be less going forward but Gilts aren't my thing.

If you go with the Gilts suggestion what is left at the end of the 10 years?

Nowt......

So you pay more to receive less overall 😳

Possibly.......depends on the cost of the gilt ladder "on the day" vs the cost of the annuity "on the day"........there are also some dealing and platform costs involved with a gilt ladder too........you'd also need to compare the payment dates on the annuity.....upfront or in arrears etc. I suspect that in reality, compared like for like, the gilt ladder might turn out slightly cheaper, but there may not be a great deal in it.......

Dazed_and_C0nfused

MK62 said:

Dazed_and_C0nfused said:

MK62 said:

Dazed_and_C0nfused said:

najan49 said:

If you took £6,500 on day 1 of year 1 AJ Bell would pay just over £2k interest on the balance left for the rest of year 1.  

This is variable rate interest so other options might be better but not sure the annuity is the best one.

Not really comparing like with like, is it? With the 10 year annuity, you know exactly what you will get and how much it will cost. The only unknown is the value of the money after inflation. With your example you are also taking on interest rate risk.

IMO a more comparable example would be a UK gilt ladder, the calculator here https://lategenxer.streamlit.app/Gilt_Ladder says that to provide £5725 pa for 10 years (starting on 1st Sept) costs £48,977.28, which is very similar to the cost of the annuity at £48,750.

Appreciate the interest rate is variable and may well be less going forward but Gilts aren't my thing.

If you go with the Gilts suggestion what is left at the end of the 10 years?

Nowt......

So you pay more to receive less overall 😳

Possibly.......depends on the cost of the gilt ladder "on the day" vs the cost of the annuity "on the day"........there are also some dealing and platform costs involved with a gilt ladder too........you'd also need to compare the payment dates on the annuity.....upfront or in arrears etc. I suspect that in reality, compared like for like, the gilt ladder might turn out slightly cheaper, but there may not be a great deal in it.......

I was actually comparing it to simply leaving the £65k in the pension and taking £6,500 out each year with whatever interest is earned left in the pension at the end of 10 years.

On these amounts it's 3.75% with AJ Bell (from September) for cash in drawdown but that is likely to drop in due course.

Kismet_Hardy

Thank you Pat38493 and Phossy. It is a psychological hill I'm going to have to climb - hopefully sooner rather than later! 

Kismet_Hardy

Dazed_and_C0nfused and Najan49 - your conversation demonstrates why many of us find it so difficult to navigate these matters - so thank you for your help. I don't understand gilts and, when push comes to shove, I'll probably take the advice of our IFA.    

MK62

Dazed_and_C0nfused said:

MK62 said:

Dazed_and_C0nfused said:

MK62 said:

Dazed_and_C0nfused said:

najan49 said:

If you took £6,500 on day 1 of year 1 AJ Bell would pay just over £2k interest on the balance left for the rest of year 1.  

This is variable rate interest so other options might be better but not sure the annuity is the best one.

Not really comparing like with like, is it? With the 10 year annuity, you know exactly what you will get and how much it will cost. The only unknown is the value of the money after inflation. With your example you are also taking on interest rate risk.

IMO a more comparable example would be a UK gilt ladder, the calculator here https://lategenxer.streamlit.app/Gilt_Ladder says that to provide £5725 pa for 10 years (starting on 1st Sept) costs £48,977.28, which is very similar to the cost of the annuity at £48,750.

Appreciate the interest rate is variable and may well be less going forward but Gilts aren't my thing.

If you go with the Gilts suggestion what is left at the end of the 10 years?

Nowt......

So you pay more to receive less overall 😳

Possibly.......depends on the cost of the gilt ladder "on the day" vs the cost of the annuity "on the day"........there are also some dealing and platform costs involved with a gilt ladder too........you'd also need to compare the payment dates on the annuity.....upfront or in arrears etc. I suspect that in reality, compared like for like, the gilt ladder might turn out slightly cheaper, but there may not be a great deal in it.......

I was actually comparing it to simply leaving the £65k in the pension and taking £6,500 out each year with whatever interest is earned left in the pension at the end of 10 years.

On these amounts it's 3.75% with AJ Bell (from September) for cash in drawdown but that is likely to drop in due course.

Don't forget the £16250 TFLS though, which you'd still have with the gilt ladder and annuity options.

Running those numbers above, converting the SIPP to cash and then taking £6500 out each year, would leave you with just under £14k after 10 years.........taking the same £5725pa as the alternative options discussed would leave you with about £23.5k.......pretty much the same amount you'd have with those gilt ladder and annuity options, plus the TFLS.......but with interest rate risk (ie if interest rates go down, you'd end up with less......and vice versa). So, in then end you just have to pick an option.........as is so often the case, only hindsight will reveal what would have been the best option to pick......

Dazed_and_C0nfused

But the op was taking 25% TFLS up front, the annuity rate was based on what was left after that.

Bostonerimus1

Kismet_Hardy said:

Dazed_and_C0nfused and Najan49 - your conversation demonstrates why many of us find it so difficult to navigate these matters - so thank you for your help. I don't understand gilts and, when push comes to shove, I'll probably take the advice of our IFA.    

How much income do you actually need? How much of your required income is covered by your existing state pension and DB pensions? Given your fairly large guaranteed income from these guaranteed sources you should consider leaving the TFLS in the DC pension and just leaving the DC pension to grow over time and plan for drawdown and leaving an inheritance.