Flat vs Indexed Annuity; front loading income?

KeiserSoze

Hi, I've been looking into annuities as am attracted to the certainty. I automatically gravitated to the 3% indexed rates and didn't really consider the flat rates. 

I'm probably very much inclined to go for the index rate but playing devil's advocate, is there a benefit for going for a flat rate? 

To my mind a flat rate is simply front loading your income to the first half of your retirement, I.e. you get more money in real terms in the first dozen or so years and data shows it's these years where people spend the most too, so it seems a nice fit. Plus you can save/invest any funds you don't use in those first few years. 

The main negative (other than the obvious inflationary one later in life) I see is that by having a flat rate I'd be pulling myself into paying income tax (or paying more IT) due to the higher upfront income. 

Very rough calculations when comparing to an index shows the indexed payment doesn't equal the flat one until 12 years into retirement, and it's around 22 years until both aggregate payments are equal, then of course after that the indexed plan takes over. 

As I say, I'm probably gonna go with the index rate anyway due to inflation concerns in later years, but don't wanna dismiss other options without at least theoretically exploring them. 

Cheers!

DRS1

Well I'd certainly go for a flat annuity if I did not feel optimistic about my life expectancy.

But then I if I felt that pessimistic I might go for drawdown instead.

You talk about an indexed annuity and mention inflation but then you talk about 3%.  Increasing annuities come in different flavours - RPI linked or fixed at 3% or 5%.  A fixed increase is not necessarily going to protect you against inflation - especially if we have some more years at 10% or 8%.  That said even an RPI linked annuity may not match your real life personal inflation rate.

Moonwolf

It is certainly something I have thought about.

The real terms reduction is quite large.  If I took one out at 60 and lived to 90 it would almost certainly more than halve in value - according to the bank of England inflation calculator £10k in 1995 would buy you £4,962 worth of stuff today, and those have been low inflation years. 

If it is your only income, would you be happy living on that plus state pension?

However, I have index linked DB pensions. which with my state pension will give me enough to live on.

Could I take out a flat annuity now,invest the tax free lump sum and use it to top things up until I am 67 and have all my pensions, then not worry about that part of my income not growing as my wants reduce, using the house if I need extra care or to go into a home?  Is that a better plan than my current drawdown that has me running out between 85 and 95 (or better or worse depending on the market).

Hoenir

Often there's little consideraton given to the excess income on a flat annuity being parked, i.e. saved into an ISA.  No need to spend it all. What the final outcome might be vs an indexed link annuity is as a consequence subjective. Might even boil down to how good someone is at managing their money. 

Linton

If you are happy to accept the volatility of investing in equity funds you may want to consider only buying sufficient index linked annuity so that together with SP your basic ongoing needs would be covered.  Anything beyond that could be left as a drawdown pot.  This would give you much more flexibility and the possibility of greater returns without the fear that in the worst case you could be left in what you would regard as real poverty.

westv

3% for a RPI seems a bit low.
I'm sure I saw 4% (50% spouse, 15 yr guarantee) and 3.8% (100% spouse) when I last perused the rates. I'm 62 though. From memory, the same level annuities were 6.5% and 6% roughly

Edit: Just had another look
3.825%
4.078%
6.227%
6.527%

Albermarle

westv said:

3% for a RPI seems a bit low.
I'm sure I saw 4% (50% spouse, 15 yr guarantee) and 3.8% (100% spouse) when I last perused the rates. I'm 62 though. From memory, the same level annuities were 6.5% and 6% roughly

I think the OP was actually referring to annuities that increase by a fixed 3% every year.

KeiserSoze

Albermarle said:

westv said:

3% for a RPI seems a bit low.
I'm sure I saw 4% (50% spouse, 15 yr guarantee) and 3.8% (100% spouse) when I last perused the rates. I'm 62 though. From memory, the same level annuities were 6.5% and 6% roughly

I think the OP was actually referring to annuities that increase by a fixed 3% every year.

Yeah exactly, the rate I was looking at had a fixed 3% annual indexation 

Notepad_Phil

KeiserSoze said:

... I'm probably very much inclined to go for the index rate but playing devil's advocate, is there a benefit for going for a flat rate?  ...

Possibly the combination of the purchase of both a flat rate and an indexed one might have some benefit if you could afford to and wanted a bit more in your early retirement but with the certainty that your later life was covered to at least some degree. But if you were choosing one over the other then I'd only ever go for an indexed annuity - especially if this was to be a joint life annuity.

DRS1

KeiserSoze said:

Albermarle said:

westv said:

3% for a RPI seems a bit low.
I'm sure I saw 4% (50% spouse, 15 yr guarantee) and 3.8% (100% spouse) when I last perused the rates. I'm 62 though. From memory, the same level annuities were 6.5% and 6% roughly

I think the OP was actually referring to annuities that increase by a fixed 3% every year.

Yeah exactly, the rate I was looking at had a fixed 3% annual indexation 

and there you go again confusing an increase with indexation.

zagfles

You have no certainty with a flat annuity or a fixed rate escalation one. You don't know what inflation will be in the next decade or 3. Front loading may be sensible but doing it using a flat annuity means you're front loading by a random unknown amount. Better way of front loading may be using a IL annuity and a declining ladder of IL gilts.