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Why buy annuity
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Cobbler_tone said:Has to totally individual based on circumstances. For some it may be their only pension and they want certainty until they meet their makers.
For me it will be a basis of a modest DB pension and a flexi drawn down of a DC pot to smooth me to state pension age. I haven't even thought about the timings and order....i.e. bridging the DB, delaying the DC, or using the DC and delaying the DB etc. I think I might get an IFA as opposed to trying to crunch the various options myself.I just used a spreadsheet showing each row as one year with columns for regular spend, big projects, tax, travel etc. as well as savings interest and any other incomes, lump sums, then , recalculates in the last column end of year value which it copies into the start of the next row and repeats the process. Its 100% dynamic So you can quickly model projected interest CPI, investment return rates and then look at the final column.
Each row shows the year and my age (which is very useful for populating the travel and projects columns) and then different points in time showing DBP and SP starting, DD Starting and ending, everything is linked to calculations for RPI, CPI and savings and investment growth rates using the same numbers as the pension providers tool for low, medium and high and a table from LGPS is linked showing the percentage reductions to pension and lump sum up to 12 years , so you can clearly see the impact of taken a DBP a few years earlier versus delaying.If you have some inheritance due or plan on downsizing your property later on you simply add a negative amount into one of the projects columns for that year and everything updatesI’m not sure what an IFA could add to this unless they have a crystal ballThe greatest prediction of your future is your daily actions.3 -
arthur_fowler said:I My TFLS is now invested to provide tax free income as part of my plan.The greatest prediction of your future is your daily actions.0
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Having become disabled in my 40s, I'm seeing buying an annuity as a similar action to downsizing to one level and getting an accessible bathroom (all of which I plan to do on retirement). Simplify life, get organised before things get worse. Doing financial tasks with massive brain fog is really miserable.
We have no kids so die with zero is fine.
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dont_use_vistaprint said:arthur_fowler said:I My TFLS is now invested to provide tax free income as part of my plan.0
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An annuity worked well for my in-laws. They had a joint one, and both lived past 85. We knew they had State pension, FIL’s modest DB pension with spouse’s pension and the annuity. When FIL was starting to get muddled about things, we knew that - on the income side at least - they were okay. FIL would have absolutely hated to have had to ask for practical or financial help, so it was about dignity as much as anything.
Fashion on the Ration
2024 - 43/66 coupons used, carry forward 23
2025 - 62/897 -
The fact that the DC pension is to be included in the assets liable for inheritance tax ( from April 2027) has suddenly made annuitising significantly more attractive.
For those intending to avoid the double or even triple taxation on the pot - The Telegraph mentions a notional 90% - the option to die with nothing (at least in that element) is clearly desirable.
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Acromion said:The fact that the DC pension is to be included in the assets liable for inheritance tax ( from April 2027) has suddenly made annuitising significantly more attractive.
A decision not to buy an annuity, in the eyes of the pensioner could be ‘my decision to be in a position to leave something if I pass away early in retirement’.
Their adult children could see it that way, or equally as ‘dad/mum’s gamble that the money won’t run out, meaning I have to support them/see them struggle in their last few years’.
Even you don’t need the annuity income, I don’t think there’s anything preventing a pensioner from gifting from it, or saving it to eventually fall into their estate. And at the same time benefitting from the ‘insurance’ against longevity.Fashion on the Ration
2024 - 43/66 coupons used, carry forward 23
2025 - 62/892 -
arthur_fowler said:zagfles said:
I can't see the point of flat annuities. You just replace investment risk with inflation risk. Even IFAs don't seem to understand this when they waffle on about breakeven points based on guesses about inflation. The point of an annuity isn't to do what maximises lifetime income. Use drawdown for that. The point is to provide a guaranteed income for the rest of your life to pay bills, shopping etc, which will likely increase with inflation, which is unknown just like stockmarket returns.
For us a flat annuity I believe was the correct route to take. Rationale is:
1) We have various DB pensions plus full SPx2 that will kick in over the next 7 years (retiring at 60). These will mitigate (but not remove) inflation risk
2) We want a (relatively) higher income in the next ten years while we are hopefully fit and well enough to travel a lot (which is what we like to do).
(It's not so bad in deferment as the cap applies across the entire period of deferment, but once in payment lumpy inflation can serious dent DB pensions)
2) Front loading retirement spend may be sensible but a flat annuity fronts loads by an unknown amount. You can easily front load retirement income to get predictable real income for instance using an IL gilts ladder, or a short term annuity, in addition to a lifetime IL annuity.0 -
Cairnpapple said:Having become disabled in my 40s, I'm seeing buying an annuity as a similar action to downsizing to one level and getting an accessible bathroom (all of which I plan to do on retirement). Simplify life, get organised before things get worse. Doing financial tasks with massive brain fog is really miserable.
We have no kids so die with zero is fine.
This would apply to everybody who does not like dealing with money issues, whether they are disabled or not.0 -
dont_use_vistaprint said:MK62 said:People buy annuities for several reasons, but perhaps the most common is for certainty of income......whether it maximises that income is unknown until many years have passed, so that's a judgement you have to make upfront (though maximising income isn't usually a reason for choosing an annuity). Same for "does if beat a drawdown plan" really - maybe, but based on historic data, probably not (but again, not usually the main driver for choosing an annuity).
As for being outdated, they fell out of favour for many years during the era of near zero interest rates, due to the poor payout percentage available......but that's changed somewhat over the last few years, and annuities are making a comeback again.
As you've said, the downside is handing over a big pile of cash upfront and potentially dying with nothing.......but it doesn't have to be either that or drawdown - it's perfectly viable to use an annuity for part of your income, and drawdown for the other part.
Dying with nothing is actually one of my goals and has been integral to my financial planning and deciding when I retired :-) I’ve never understood people who work far longer than necessary just to leave a ton of cash to the next generation. I’d much rather invest it in them while we are alive and let them make their own money when I’m dead.
I think everyone should spend their wealth in their life or leave it to charity but thats just my opinion. The risks of doing that without a guaranteed income is that you end up living vastly longer than you anticipated and so you actually spend it all long before your gone.
Pension freedoms only happened in 2015 so we're only 10 years into people being able to do something other than buy an annuity. The first adopters are likely only in their early to mid 70s so many will have a decade more of life to go yet and some multiple decades. Feels likely there is a sting to come in the future for some who exercised their new freedoms.
From personal experience my uncle retired in 2015 and had a similar mentality and was burning through his money as his grand parents, parents and all 8 of his brothers died in their late 60s so he assumed he had 5 years or so to go. Family did have words with him after a few year but immediately after he had a health scare so argued back he was doing the right thing and let him enjoy it. Well he's 76 now and living an extremely different lifestyle having gone from near 6 figure income to little more than state pension but still fit and healthy just can't afford to enjoy it.3
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