Annuity Rates

NoMore

westv said:

michaels said:

incus432 said:

Spivo46 said:

I have taken some of my tax free cash to live off until my state pension kicks in 15 months time.
I am thinking of supplementing that income with a 10 year fixed term annuity (using a third of my pension fund). I am doing this so i have a peace of mind with a guaranteed income for 10 years. Is it advisable to do the online search for the best annuity returns OR request the assistance of an IFA who may have access to improved rates?

Used Retirement Line and they were very efficient and got a better rate than MoneyHelper quoted. Then an IFA (local) came back who was willing to do it and their quote was a bit better again (with 1% of pot as fee).  Wasnt worried about inflation over the period (8 yr) so went with flat rate but with a full term guarantee period in case of death.

Seems odd to me to choose a product associated with being risk averse and then taking a risk on inflation that the final year payment might vary by at least 20% in real terms depending on the inflation path over the 8 years.

I am sure I read on here that, when annuities were all the rage for retirement, the vast majority were bought on a level basis. Maybe that was partly due to the SP being indexed linked??

Just out of curiosity I had a look as to what I might get (lifetime annuity) with my current pot - HL website choosing 50% survivor + 15 year guarantee. I am not retiring yet so I am only looking out of interest.

Level £25,780
RPI £15,592

I can see how a level annuity it tempting. That extra money now could be useful.

I think its more to do with the general populous not really understanding the effect of inflation and choosing the bigger number at the start

QrizB

NoMore said:

westv said:

I am sure I read on here that, when annuities were all the rage for retirement, the vast majority were bought on a level basis. Maybe that was partly due to the SP being indexed linked??

I think its more to do with the general populous not really understanding the effect of inflation and choosing the bigger number at the start

Also, people underestimate their life expectancy.

They look back to their parents and grandparents who died in their 60s or 70s and don't consider that they're likely to live until their late 80s.

incus432

michaels said:

incus432 said:

Spivo46 said:

I have taken some of my tax free cash to live off until my state pension kicks in 15 months time.
I am thinking of supplementing that income with a 10 year fixed term annuity (using a third of my pension fund). I am doing this so i have a peace of mind with a guaranteed income for 10 years. Is it advisable to do the online search for the best annuity returns OR request the assistance of an IFA who may have access to improved rates?

Used Retirement Line and they were very efficient and got a better rate than MoneyHelper quoted. Then an IFA (local) came back who was willing to do it and their quote was a bit better again (with 1% of pot as fee).  Wasnt worried about inflation over the period (8 yr) so went with flat rate but with a full term guarantee period in case of death.

Seems odd to me to choose a product associated with being risk averse and then taking a risk on inflation that the final year payment might vary by at least 20% in real terms depending on the inflation path over the 8 years.

Thre are risks and risks. It depends on the impact if that risk turns into reality (low for us on inflation in the next 8 years, as other sources of income) and crucially what you are prepared to pay to mitigate that particular risk,. The premium you pay for an escalating annuity is high.  

Albermarle

hotncold47 said:

Thats the dilemma with annuities, I'm pondering this at the moment. In my case a lifetime single flat would generate £8852 against RPI £6392 so a £2460 difference. So do I go with the Flat and use the difference in a S&S and hope it covers inflation? Which sort of defeats the purpose of using an annuity to make things simpler as I'm getting older.

Also crudely looking at break even points the flat would be about eleven years and RPI fifteen years not factoring in any inflation. With the lower amount plus SP I will be covering my base costs and still have funds remaining in a Sipp.

You can hedge your bets in the middle, with an annuity that increases by a set % each year, ( say 3 or 5%).
I think you would get a better annual income than an RPI linked , as the annuity provider does not have any open ended risk. 

DRS1

Albermarle said:

hotncold47 said:

Thats the dilemma with annuities, I'm pondering this at the moment. In my case a lifetime single flat would generate £8852 against RPI £6392 so a £2460 difference. So do I go with the Flat and use the difference in a S&S and hope it covers inflation? Which sort of defeats the purpose of using an annuity to make things simpler as I'm getting older.

Also crudely looking at break even points the flat would be about eleven years and RPI fifteen years not factoring in any inflation. With the lower amount plus SP I will be covering my base costs and still have funds remaining in a Sipp.

You can hedge your bets in the middle, with an annuity that increases by a set % each year, ( say 3 or 5%).
I think you would get a better annual income than an RPI linked , as the annuity provider does not have any open ended risk. 

When I got quotes last year the 5% escalating annuity was about 10% more expensive than the RPI escalating annuity

hotncold47

Just checked Moneyhelper rates 3% escalating increased starting yearly amount by £586 compared to RPI and 5% reduced amount by £513.

Another query regarding annuity calculators I have is on Moneyhelper there is no mention of TFLS so I assume just add 25% to the amount I want to use for the annuity but the HL calculator has a sliding scale which you can self adjust? Am I wrong in thinking the TFLS is a fixed 25%?

Sorry to have jumped on the OP's thread and thank you for the input.

SmokeysTravels

The Moneyhelper site assumes all the pension pot is used to buy the annuity. If you are planning to take tax free cash remove that amount from the pot. 

OldScientist

hotncold47 said:

Thats the dilemma with annuities, I'm pondering this at the moment. In my case a lifetime single flat would generate £8852 against RPI £6392 so a £2460 difference. So do I go with the Flat and use the difference in a S&S and hope it covers inflation? Which sort of defeats the purpose of using an annuity to make things simpler as I'm getting older.

Also crudely looking at break even points the flat would be about eleven years and RPI fifteen years not factoring in any inflation. With the lower amount plus SP I will be covering my base costs and still have funds remaining in a Sipp.

One way to think about the choice is whether the income will continue to be enough.

Assuming the amount of income from the RPI is enough today then it ought to be enough for a lifetime.

Whether the income from the level annuity remains enough entirely depends on inflation.

In the example you gave, assuming a constant inflation of 3%, it would take about 13 years before the real income from the level annuity fell below that for the RPI annuity. At constant 5% inflation the time would be 8 years.

Of course, as we've seen over the last few years, inflation can be very lumpy. Take a look at the 1970s at https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/czbh/mm23- starting in 1973 it would have taken only 3 or 4 years to erode the initial advantage of the level annuity. A lot of retirees had their incomes devastated during that decade (and the 80s).