Annuity choice

mlv-1967

I've been made redundant at age 58, and given the current state of the job market, I've decided to take the giant leap into retirement!
I recently obtained quotes for an annuity from a respected and well known broker.  I was quoted around £50k a year for a flat rate annuity, £35.5k a year for an RPI annuity and £36.5k a year for a LPI to 5% annuity. Not quite sure which of these options would be right for me.  I also have a small DB pension (LPI 5% indexed) that would pay me £8.65k a year at age 60. 
I'm instinctively drawn to the LPI, given the relatively minor risk of inflation exceeding 5% and the extra £1k on the pension. I don't think I need a flat rate annuity as these are best for folk with small funds who need as much as possible upfront. I do have some minor health issues and these have boosted my rates slightly.
As for drawdown, this is something that makes me very nervous. I wouldn't be comfortable with leaving funds invested while I draw amounts.

Any advice?

Marcon

mlv-1967 said:

I've been made redundant at age 58, and given the current state of the job market, I've decided to take the giant leap into retirement!
I recently obtained quotes for an annuity from a respected and well known broker.  I was quoted around £50k a year for a flat rate annuity, £35.5k a year for an RPI annuity and £36.5k a year for a LPI to 5% annuity. Not quite sure which of these options would be right for me.  I also have a small DB pension (LPI 5% indexed) that would pay me £8.65k a year at age 60. 
I'm instinctively drawn to the LPI, given the relatively minor risk of inflation exceeding 5% and the extra £1k on the pension. I don't think I need a flat rate annuity as these are best for folk with small funds who need as much as possible upfront. I do have some minor health issues and these have boosted my rates slightly.
As for drawdown, this is something that makes me very nervous. I wouldn't be comfortable with leaving funds invested while I draw amounts.

Any advice?

Yes. Read your own post and you've answered your own question - it often happens where people commit their thoughts to writing and, consciously or otherwise, have clearly reached a conclusion they are happy with.

You clearly have a substantial pot with which to buy your annuity, so have you considered asking an IFA to get you some quotes? They can often get you a better rate (even taking into account their fee) than you'd get for yourself, or via a broker.

DRS1

We have had 2 years in the last 20 where RPI has exceeded 5%.  Personally I would not pick an LPI version over an RPI version but it is your money.

dunstonh

I recently obtained quotes for an annuity from a respected and well known broker. 

The annuity quote is large which suggests a large fund value.    Check the commission the broker is taking as many of the only brokers take a percentage with no cap.   The larger the fund, the larger the commission, the lower the annuity rate.   If they are taking an open ended percentage then you may be better with an IFA.  Many of whom taper the fee or have a cap.   

I'm instinctively drawn to the LPI, given the relatively minor risk of inflation exceeding 5% and the extra £1k on the pension. I don't think I need a flat rate annuity as these are best for folk with small funds who need as much as possible upfront. 

Has the broker modelled the differences for you?   (i.e. breakeven points for catching up with level and cumulative payouts?)

They are not necessarily for small funds.  Its more about how much you spend and what on vs what you need.

mlv-1967

The fund size is £717k (after £43k of tax free cash has been deducted) and the commission is £10k, which seems reasonable (1.4%).  I did speak to an IFA beforehand, but he wanted to sell me a cash-flow plan for £2,500 before he would discuss annuities, so I said no to that.
I did my own calculations and comparisons when considering a flat-rate annuity but I didn't feel comfortable with being exposed to inflation. I tend to be very cautious by nature, because in my life when s**t could have happened, it usually did (pardon my French).  I am not a huge spender and I don't go on vastly expensive holidays.  I'm just taking the £43k tax free to get a new car and for some house repairs.

leosayer

A few thoughts:

I hear what you say about drawdown, but won't you get a substantial tax free lump sum when you take your annuity? What is your plan for that? How does this fit in with any other non-pension savings you have?

Are you entitled to state pension? The total of this plus your DB and annuity may take you into higher rate tax. 

Instead of spending your entire pot on an annuity, retaining some of the pot and drawing to down may allow you to maximise your income at the basic rate of tax and avoid higher rate tax once your state pension arrives.

You don't have to make one choice of annuity, you could do some at RPI, some at LPI, some flat and possibly some for a fixed term of, perhaps for 10 years until your state pension arrives.

Might sound like a silly question but will you spend all that annuity income? What do you actually need to live the life you want now you find yourself retired?

DRS1

I have no idea what a cash flow plan might be but presumably he would want to establish whether you can live on £35k a year.  So he'd be looking at what you spend and what other income you might have.  Something you may have done already?

mlv-1967

DRS1 said:

We have had 2 years in the last 20 where RPI has exceeded 5%.  Personally I would not pick an LPI version over an RPI version but it is your money.

I assume both times were during Covid?  Covid is a 'black swan' event, typically a once in a 100 year event, so unlikely to happen again while I'm alive. There is a possible risk of returning to the high inflation of the 1970s but that seems very unlikely given that all parties are committed to sound monetary policy and we now have an OBR to police that. 

LHW99

Which one(s) would fit your income needs?

What will you state pension be at SPA?

As you have a small DB, and presumably at least a reasonable expectation of SP, your requirements from your pots will reduce over time. So would one (or more) fixed term annuities work to cover the gap between 58 and SPA, giving you some capital back for later? - maybe something like this is what the IFA was thinking when he spoke about a cash-flow plan?

mlv-1967

DRS1 said:

I have no idea what a cash flow plan might be but presumably he would want to establish whether you can live on £35k a year.  So he'd be looking at what you spend and what other income you might have.  Something you may have done already?

Correct. And I also have a DB pension that kicks in in two years. Mortgage has £14k left, so will be paid once I get the tax free cash.

mlv-1967

leosayer said:

A few thoughts:

I hear what you say about drawdown, but won't you get a substantial tax free lump sum when you take your annuity? What is your plan for that? How does this fit in with any other non-pension savings you have?

Are you entitled to state pension? The total of this plus your DB and annuity may take you into higher rate tax. 

Instead of spending your entire pot on an annuity, retaining some of the pot and drawing to down may allow you to maximise your income at the basic rate of tax and avoid higher rate tax once your state pension arrives.

You don't have to make one choice of annuity, you could do some at RPI, some at LPI, some flat and possibly some for a fixed term of, perhaps for 10 years until your state pension arrives.

Might sound like a silly question but will you spend all that annuity income? What do you actually need to live the life you want now you find yourself retired?

The £717k is after I have taken £43k tax free, so the total fund is £760k. The tax free sum is to clear the mortgage, buy a new car (mine is 9 years old) and do some minor house improvements.
According to my most recent HMRC quote I am already entitled to a full state pension at 67.

I have already some with all permutations for fixed rate annuities etc, but my best outcome is to get an annuity now, and at 60 take the DB pension as a 'two-stepper': initial step being a higher pension of around £14.5k, followed by a lower pension of around £5.5k once the state pension kicks in.

I am aware of tax implications but not too concerned.  I want my pension to be like a salary, a steady income without complex tweaking, changes here and there, and so forth.