Look at my DIY plan, comments suggestions and criticism welcome

PropertyGuru_Wannabe

I will go against the tide of opinion here and other possible interests.  An Annuity is good if you want to limit your risk through sequence of returns, and do not have the immediate finances (or stomach) to endure ups and downs of the market.  However insurance companies price annuities to always make a profit, based on your average life expectancy, which is probably around 90 years old for a healthy average individual.  

It's catered for risk averse individuals and people who wish peace of mind.  It reminds me of the people who wishes to overpay their mortgage as soon as possible yet knowing that it would probably be financially better if they invested the money instead.  You might say there's no right or wrong choice, but to me you should always believe in the maths and stick with it. 

Secret2ndAccount

PropertyGuru_Wannabe said:

I will go against the tide of opinion here and other possible interests.  An Annuity is good if you want to limit your risk through sequence of returns, and do not have the immediate finances (or stomach) to endure ups and downs of the market.  However insurance companies price annuities to always make a profit, based on your average life expectancy, which is probably around 90 years old for a healthy average individual.  

It's catered for risk averse individuals and people who wish peace of mind.  It reminds me of the people who wishes to overpay their mortgage as soon as possible yet knowing that it would probably be financially better if they invested the money instead.  You might say there's no right or wrong choice, but to me you should always believe in the maths and stick with it. 

So presumably you don't insure your house because the insurance companies make a profit?
Insurance companies are able to pool risk in a way that individuals cannot. Suppose I have £100,000 and I expect to live another 10 years. I could therefore spend £10k per year. But what if I'm a little off, and I live for 12 years? Those last two years are going to be pretty miserable living with no money. So I might decide to draw £8k per year, so I can safely last 12 years. The annuity company can pay me £9k per year. If I last the expected 10 years, they have made 10k profit. If I last 12 years, they are okay because somebody else with an annuity died after just 8 years. On average, they can make a profit, but still pay you more than you could safely draw down.
If leaving an inheritance is not a priority, a fairly priced annuity can be a useful tool in your arsenal.

For a 60 year old, planning to live to 90, the Safe Withdrawal Rate is maybe 3.5%. An RPI linked annuity currently pays 4.7%. It would be a brave soul who commenced a 30 yr drawdown at 4.7% with no plans to cut back if things didn't go their way.

MK62

..... but maths can't possibly give you an answer which is guaranteed to be right - there are too many unknown (and unknowable) variables.......
With an annuity you have a guaranteed income for life (however long that might be).......that's the main point.
Currently, for a 60yo, £100k will buy an index linked income for life starting at around £4400pa........there is no way to say the same about drawing that down from a £100k pot.......it might well, but there is no guarantee.

Triumph13

The maths says that you should only ever buy insurance against catastrophic risks.  You shouldn't shell out for a policy every time you buy a gadget, or appliance, because you can afford the cost of replacement yourself, and over a lifetime it will be cheaper to self insure.  In contrast, most people can't easily swallow the cost of their house burning down, or falling ill whilst on holiday in the US, so taking a certain small loss (the insurance premium) is well worth it to remove that small, but catastrophic risk.

If you want to self insure an annuity, you could always set up an index linked bond ladder to last for your average life expectancy. And buy yourself a gun to blow your brains out if you live longer than that. Not many people find that an attractive option.

Otherwise, your choice is between buying an annuity, or staying invested and taking some kind of SWR approach.  With the latter option, you could again go for a high withdrawal rate, with a historic 50% success rate, plus the gun. Most people will want something rather more prudent and will want it to last until their maximum life expectancy, not just the average.

At this point in time, annuity rates are higher than historic safe withdrawal rates and there seems to be precious little evidence that this is going to be a particularly good time to start a drawdown sequence.  The maths says an annuity is an eminently sensible choice for anyone not heavily focused on leaving an inheritance.

PropertyGuru_Wannabe

Yes there are a lot of variables that are unknown but the crux of the information is there for the OP to plan. If the OP goes to guiide and use their program which gives a rough indication on his pot on retirement and continued investment for the next 30 years, the pot won’t be £1 mil despite his drawdown for £24k income a year. It will be over £4 mil. 

Do you seriously think that the OP will ever run out of money and need that annuity to survive?

ali_bear

I have used guiide to explore various scenarios, I notice that it recommends using a quarter of my pot to purchase an annuity, and I wondered where this level comes from. 

Sure enough in my simple planning sheet, using current values, having the annuity works out considerably better if I live beyond 80. 

I'm not too concerned about running out of money, I'm trying to figure out if I should always turn to the left on airplanes, or switch to what I consider to be a luxury car 

leosayer

PropertyGuru_Wannabe said:

I will go against the tide of opinion here and other possible interests.  An Annuity is good if you want to limit your risk through sequence of returns, and do not have the immediate finances (or stomach) to endure ups and downs of the market.  However insurance companies price annuities to always make a profit, based on your average life expectancy, which is probably around 90 years old for a healthy average individual.  

It's catered for risk averse individuals and people who wish peace of mind.  It reminds me of the people who wishes to overpay their mortgage as soon as possible yet knowing that it would probably be financially better if they invested the money instead.  You might say there's no right or wrong choice, but to me you should always believe in the maths and stick with it. 

It's not just insurance companies.

Investment platforms, fund managers, custodian banks and registrars are also in this profit business. 

Best to keep your money under the mattress to avoid the risk that someone might charge you a few quid for providing a service you would benefit from.

Hoenir

PropertyGuru_Wannabe said:

It reminds me of the people who wishes to overpay their mortgage as soon as possible yet knowing that it would probably be financially better if they invested the money instead.  

Comments generally reflect the lifetime experience of the poster. Always a new generation who truly think that "This Time is Different".  Financial history is littered with periods of debt and credit booms resulting in overpriced markets. Not everyone comes out a winner. 

Cus

Triumph13 said:

The maths says that you should only ever buy insurance against catastrophic risks.  You shouldn't shell out for a policy every time you buy a gadget, or appliance, because you can afford the cost of replacement yourself, and over a lifetime it will be cheaper to self insure.  In contrast, most people can't easily swallow the cost of their house burning down, or falling ill whilst on holiday in the US, so taking a certain small loss (the insurance premium) is well worth it to remove that small, but catastrophic risk.

If you want to self insure an annuity, you could always set up an index linked bond ladder to last for your average life expectancy. And buy yourself a gun to blow your brains out if you live longer than that. Not many people find that an attractive option.

Otherwise, your choice is between buying an annuity, or staying invested and taking some kind of SWR approach.  With the latter option, you could again go for a high withdrawal rate, with a historic 50% success rate, plus the gun. Most people will want something rather more prudent and will want it to last until their maximum life expectancy, not just the average.

At this point in time, annuity rates are higher than historic safe withdrawal rates and there seems to be precious little evidence that this is going to be a particularly good time to start a drawdown sequence.  The maths says an annuity is an eminently sensible choice for anyone not heavily focused on leaving an inheritance.

It's apples and pears to compare against SWR's. You could die in 6 years, you could end up with a huge inheritance etc etc. it would be better to compare against withdrawal rates using the 'end with zero' options, but that doesnt account for life expectancy.

Be interesting to compare against an annuity that guarantees a 30 year payment from age 65 only despite an early death or living longer

MK62

MoneyHelper's site suggests that, for £100k, a 60yo could expect c£4080pa for a single life RPI linked annuity with a 30yr guarantee. For comparison a 30yr IL gilt ladder would currently pay c £4350pa (more, but there's no longevity cover should you live beyond 30y).......and SWR to zero suggests around £3500pa (though that's equivalent to historic worst case, and also depends on asset allocation......there's a good chance it would be higher but you don't know that at the start).
So in the end, you have to make a choice today (without hindsight).....the former two options are guaranteed, while the SWR option is not, so that requires a judgement call on the relative risks involved.