Annuity rate. Is this reasonable?

LookingForAnAnswer

Hi. I plan to combine my personal pension pots and probably take an annuity for my retirement at age 65 soon. I've had one of several offers and I want to know if forum members, more knowledgeable than me, think it's ok.  
It will give me a return of 5.3% of the pot in the first year, then increase every year by the RPI until I die. It also includes a 10 year guarantee period.
I'm in ok health. Many commentators online are sniffy about annuities and think that a drawdown pension is the best option. But when I search the internet for typical historical fund growth rates they're not much better that the 5.3% above and could be worse in the future. Of course, no one knows! I'm really not very interested in managing my money in the future so this would bring simplicity to my life. 
Does it seen ok? Thanks

DRS1

There are annuity comparison sites on the internet.  You can put your figures and health details into those and get some results which should tell you if you can get a better rate or not.

When pension providers give you an annuity quote for the pension you hold with them they are also meant to tell you if you can get better elsewhere (though they don't actually tell you where).

I am not sure why you are comparing an annuity rate with a growth rate on an invested pot.  It is not the same thing.

Mark_d

So your combined pension pot would increase in value by 5.3% in the first year.   Then you would buy an annuity which would increase by RPI, with a 10 year guarantee?  What annuity rate are you being offered?

Annuities are currently a good option but RPI-linked annuities are rare.  Why do you want a 10 year guarantee?  Are you going for single or joint life?

DRS1

I think what he is saying is that say he had a pension pot of £100k he would get a starting annuity of £5300 which would go up in line with RPI on the anniversary of commencement.

hotncold47

Annuities are currently a good option but RPI-linked annuities are rare.  Why do you want a 10 year guarantee?  Are you going for single or joint life?

They are not rare as i'm in the process of doing one at the moment?

Lifetime single no guarantees RPI  age 71  6.5%   Retirementline

dunstonh

. But when I search the internet for typical historical fund growth rates they're not much better that the 5.3%

That figure is meaningless without context.  i.e. what assets were used to give that figure?
For example from 1915 to 2023 The median nominal annualised return of:
0% equites/100% bonds is 5% pa.
100% equities/0% bonds is 12% p.a.
(and moves between the two as you switch from bonds to equities)

Many commentators online are sniffy about annuities and think that a drawdown pension is the best option.

Statistically, drawdown should give the best outcome in most periods but it depends on how much you are pushing the withdrawal rates, the way you invest and the strategy you use and what other assets you have.

Annuity is about security of income.   But it comes at the price of kissing goodbye to 75% of the pot.   Everyone will have different views on that.

Annuities are currently a good option but RPI-linked annuities are rare.  Why do you want a 10 year guarantee?  Are you going for single or joint life?

If you mean rare as in people not buying them, then that would be correct.  The breakeven point using reasonable assumptions is often late 80s.   So, many people prefer to bank the excess now and save it up for later life when they are probably spending less on lifestyle things than they did in their early retirement years.

10 year guarantee is a good question.    Statistically unlikely to be called into play but cost of it is not great.  Value protect would typically take it closer to 14 years and of course, there is the option of 20 or 30 year guarantees.   However, the cost of guarantees could be more expensive than a 100% spouse annuity.

Bostonerimus1

LookingForAnAnswer said:

Hi. I plan to combine my personal pension pots and probably take an annuity for my retirement at age 65 soon. I've had one of several offers and I want to know if forum members, more knowledgeable than me, think it's ok.  
It will give me a return of 5.3% of the pot in the first year, then increase every year by the RPI until I die. It also includes a 10 year guarantee period.
I'm in ok health. Many commentators online are sniffy about annuities and think that a drawdown pension is the best option. But when I search the internet for typical historical fund growth rates they're not much better that the 5.3% above and could be worse in the future. Of course, no one knows! I'm really not very interested in managing my money in the future so this would bring simplicity to my life. 
Does it seen ok? Thanks

Do you mean the pay out rate in the first year is 5.3%? If so that's a combination of investment returns and return of capital. Be careful when you compare an annuity with drawdown as one is guaranteed lifetime income from an insurance policy and the other is risky income from an investment portfolio.

FIREDreamer

Bostonerimus1 said:

LookingForAnAnswer said:

Hi. I plan to combine my personal pension pots and probably take an annuity for my retirement at age 65 soon. I've had one of several offers and I want to know if forum members, more knowledgeable than me, think it's ok.  
It will give me a return of 5.3% of the pot in the first year, then increase every year by the RPI until I die. It also includes a 10 year guarantee period.
I'm in ok health. Many commentators online are sniffy about annuities and think that a drawdown pension is the best option. But when I search the internet for typical historical fund growth rates they're not much better that the 5.3% above and could be worse in the future. Of course, no one knows! I'm really not very interested in managing my money in the future so this would bring simplicity to my life. 
Does it seen ok? Thanks

Do you mean the pay out rate in the first year is 5.3%? If so that's a combination of investment returns and return of capital. Be careful when you compare an annuity with drawdown as one is guaranteed lifetime income from an insurance policy and the other is risky income from an investment portfolio.

An annuity rate of 5.3% at age 65 looks about right - £5,300 per £100,000 purchase money.

LookingForAnAnswer

Wow. Thank you for all
your replies which are giving me a 
lot to think about. I didn’t want to give personal financial details. As DSR1 above says, for a pot of £100,000, I’d get £5,300 pa linked to RPI. (My pot is more than this but you can work it out pro rata). I didn’t ask for a guarantee period from my broker but he gave me a range of option. Perhaps I should ignore it. My dependents nearest and dearest don’t need my money after my death so single life. Contrary to the opinion of dunstonh above, one could spend more in later life on things like care/builders/taxis/private medicine, moving to a bungalow etc so I don’t see a reduction in expenditure in older age. I’ve seen this with old relations. All my siblings are older, some much, so I hope to live another 20 years or so. 

I’m afraid I don’t understand some of the more detailed comments above but thanks . 

The purpose of my original question was to find out if I took drawdown instead of this annuity offer, could I expect a
much better return than an annuity over the coming years assuming I withdrew 5.3% pa from drawdown and left the rest to grow? Thanks

HappyHarry

LookingForAnAnswer said:

The purpose of my original question was to find out if I took drawdown instead of this annuity offer, could I expect a much better return than an annuity over the coming years assuming I withdrew 5.3% pa from drawdown and left the rest to grow? Thanks

I think what you are asking is if you went with drawdown, would you be able to spend more during your lifetime than you would if you purchased an annuity?

Nobody knows the answer to that. It will depend on markets, your attitude to risk and your discipline. One of those three is outside of your control. 

Really, it is a question of do you want certainty in your future income, or are you prepared to risk at least some of your income in order to potentially get more income? As Dirty Harry once said, "Do you feel lucky, punk?"

We don't know the answer now - indeed we can only possibly know that at the end of your lifetime.

If you are uncertain which way to go, one option would be to purchase an annuity with part of your pension and keep the rest in drawdown, at least for a while.

Bostonerimus1

LookingForAnAnswer said:

Wow. Thank you for all
your replies which are giving me a 
lot to think about. I didn’t want to give personal financial details. As DSR1 above says, for a pot of £100,000, I’d get £5,300 pa linked to RPI. (My pot is more than this but you can work it out pro rata). I didn’t ask for a guarantee period from my broker but he gave me a range of option. Perhaps I should ignore it. My dependents nearest and dearest don’t need my money after my death so single life. Contrary to the opinion of dunstonh above, one could spend more in later life on things like care/builders/taxis/private medicine, moving to a bungalow etc so I don’t see a reduction in expenditure in older age. I’ve seen this with old relations. All my siblings are older, some much, so I hope to live another 20 years or so. 

I’m afraid I don’t understand some of the more detailed comments above but thanks . 

The purpose of my original question was to find out if I took drawdown instead of this annuity offer, could I expect a
much better return than an annuity over the coming years assuming I withdrew 5.3% pa from drawdown and left the rest to grow? Thanks

The general advice would be to withdraw 3% to 4% with annual RPI increases if you are doing drawdown from something like a 60% equities and 40% bonds portfolio. The lower amount of the withdrawal compared to the annuity is because you want your pot to last for maybe 30 years and don't have an insurance company to guarantee your income or the mortality credits of an annuity. The likelihood is that you'll have money left in the pot when you die...maybe a lot of money. You also have access to your capital for emergencies or if you want to do some charitable giving or increase your payments if your pot is growing well. In purely financial terms there's a strong probability that you and your heirs will be better off with drawdown rather than an annuity, where the annuity wins is you can sit back and be guaranteed income for life. A hybrid approach where you use the annuity to give a certain level of basic income and do drawdown with the rest can be a good solution allowing people to sleep at night and still have the flexibility of access to a nest egg.