How Do You Invest in Retirement?

ali_bear

My plan is to buy annuity using about half of my DC pot (after TFC), and the rest will be invested in global equity funds mostly. I am fortunate in that the annuity income plus state pension when it starts will cover my living costs, so the remaining DC fund can afford be more adventurous. 

The annuity component is essentially a form of insurance backed by bonds, so the underlying investment mix is roughly 50/50 bonds and equities. 

Hoenir

bfgun said:

QrizB said:

Annuities are currently better value than safe withdrawal rates are.

Global index funds might generate 7-10% gross, but again they might not. They're vulnerable to many common things that aren't even close to being "black swan" events.

bfgun said:

What do people here do? 

Read, learn, understand.

I appreciate one can never tell, and as we have seen with tariffs etc., the markets can swing violently.

Individual markets can also tread water for extended periods of time.  

thebizz

Are people buying annuities that are guaranteed against inflation no matter the number? My DB (not old enough to take just yet) is capped at 5% so real growth has taken a hit in recent years it will never recover from.  If looking at historical dates such as 70/80 the rate was well above 5% (one year over 25%)
Also for people prefering annuities are you just paying the full amount of tax? If you use the full pot and and/or have DB pension then later state pension its all going to be taxable at normal rate.  

Albermarle

Are people buying annuities that are guaranteed against inflation no matter the number? 
It varies. Some prefer level annuities ( no annual increases) as they get a bigger income whilst they are still young enough to spend it. Or fixed term, where you get your money back ( or near enough) after a 5 or 10 years.

Also for people prefering annuities are you just paying the full amount of tax? If you use the full pot and and/or have DB pension then later state pension its all going to be taxable at normal rate.  

You pay tax if you drawdown from the pot after taking the tax free cash, so its the same really.

bfgun

@QrizB @dunstonh @Marcon @Cobbler_tone @OldScientist @leosayer @Strummer2 @ali_bear @Hoenir @thebizz @Albermarle

Many thanks to everyone that has replied.

It is very helpful to get opinions of others that are in retirement and living off investments and / or have a better understanding of the options available.

Some asked why I thought annuities were not a good deal. Well, my understanding was that annuities did not offer great rates, maybe 3 or 4%, and I did not think this was a great return given inflation (real inflation) is much higher.

However, maybe the rates offered are now much better? If so, I understand the greater attraction to them.

Your responses and insights have given me a variety of options to explore during the next 5 years, which is the timeline I have set to retire.

Thank you.

leosayer

thebizz said:

Are people buying annuities that are guaranteed against inflation no matter the number? My DB (not old enough to take just yet) is capped at 5% so real growth has taken a hit in recent years it will never recover from.  If looking at historical dates such as 70/80 the rate was well above 5% (one year over 25%)
Also for people prefering annuities are you just paying the full amount of tax? If you use the full pot and and/or have DB pension then later state pension its all going to be taxable at normal rate.  

Are you sure that your deferred DB 5% growth cap has taken a hit? My understanding is that deferred DB schemes like yours revalue using the statutory minimums that can be found here: https://www.legislation.gov.uk/uksi/2024/1174/article/2/made

For info:
Column 2 = The 5% cap
Column 3 = The 2.5% cap

You can see in the table in certain periods the growth is more than 5% per year because the annual uplift is compounded over the full period of deferment meaning that relatively few should lose out in the way you describe. Luckily, we haven't had an inflation period like the 70/80s but this is why some may get comfort from a fully index an annuity (without a cap) such as in the example linked below, or diversify your investments to mitigate. Another point to note is that DB schemes have discretion to award increases above their caps, but there are no guarantees with that.

https://www.hl.co.uk/retirement/annuities/best-buy-rates

Regarding your second question, aside from those with very large pots, almost everyone buying an annuity will get a tax free lump sum of 25% of their pot (or the amount used to buy an annuity) first. The remaining 75% will be used to buy the annuity. Of course, that income is likely to be taxed at basic rate once state pension is paid but the same goes for any amounts drawn down.

Such a 'problem' can be mitigated by retiring well before state pension and taking a drawdown first or taking a fixed term annuity that ends when state pension starts.

Personally, I'm happy to pay basic rate tax in retirement because ...
a. I need the money
b. It's mine, I earned it
c. I didn't pay income tax or NI on it when I contributed

Hoenir

bfgun said:

Some asked why I thought annuities were not a good deal. Well, my understanding was that annuities did not offer great rates, maybe 3 or 4%, and I did not think this was a great return given inflation (real inflation) is much higher.

Annuities come in may flavours. Investment returns have been exceptional for a period of time. Eventually exceptionalism has to reflect the cold hard reality of actual financial company performance. 

dunroving

bfgun said:

I’m wondering how I will invest my pensions and ISA’s in retirement tax efficiently. 

Annuity’s don’t seem to offer great interest rates.
If the money is put into a global index fund, this could generate a 7-10% annual return on average, but could suffer if a black swan event occurs. 

What do people here do? 

[caveat: I'm no expert but can reflect on my own experiences if that's any help]

This is a very interesting question. The main concern as I see it is that, in retirement, most people (probably) are not able to continue substantial regular payments into a DC pension (SIPP, S&S ISA, whatever). I first encountered DC pensions when I started working in the States in the 1990s, where DB pensions are few and far between. Over 25+ years, I saw blips in the market as buying opportunities and saw my retirement on the horizon as time available to ride out periods of market turbulence. In retirement, the former no longer applies and at age 68 the latter applies much less than when I was in my 40s and 50s.

Until recently (staring with Covid), I was relatively unfazed by market turbulence but I have become more nervous at the possibility that I might not be able to touch my DC holdings following another major global event, or that if I did, I would be consolidating losses. The unpredictability of recent events makes me even more nervous. Even with a pretty diverse set of holdings, my SIPP has only recently got back to where it was 5 years ago and is still about 10% lower than it was 4 years ago. Interestingly, my S&S ISA has recovered completely and is now 13% up on that same high point 4 years ago. 

I recently decided to use my SIPP to purchase a fixed term 5-year annuity. I'm fortunate that at the same time I decided to look into the possibility, annuities have risen to an almost all-time high over the 8 years of my retirement. In fact if I had used my SIPP to purchase an annuity 4 years ago when my SIPP balance was at its highest, I would have got a pretty poor yield. My strategy is therefore to take annuity income for 5 years and leave my S&S ISA "as is", drawing on it when and if I want to. I toyed with the idea of a lifetime annuity but (a) I prefer the flexibility a fixed-term annuity gives me in 5 years time and (b) although I am ostensibly very healthy, my genes are not so in 5 years time I may be able to purchase an enhanced annuity, and/or use the maturity balance for health or care costs.. 

I realise there are risks in my strategy - for example, in 5 years annuity rates may once again be low. But at least I have the peace of mind that over the next 5 years, whatever happens globally, I have a guaranteed income and a guaranteed maturity value not too far off my initial purchase amount. As a ballpark figure, for £100k I could buy 5% yield every year for 5 years and then get my capital returned, still sheltered under a pension umbrella.

Hope that helps - everyone is different, but I think the challenges in later life are different than during work life and managing a portfolio becomes more of a chore (yes, I know some people enjoy it!)

FIREDreamer

I just annuitised the remainder of my drawdow. RPI uncapped with a 20 year guarantee period and got a rate of 5.2% just before the provider slashed its rates by 12% at the end of last month.

I can use my ISA for portfolio fun, especially now my retirement income is guaranteed.

bfgun

@dunroving Thank you, that's very interesting and helpful. 

I asked this question because I had an idea of what I might do, but your experience and those of others, has shown me that there are many different options, as well as risks. 

For example, I didn't know that you could buy an annuity and get your capital back after a certain period.

And, as I mentioned in an earlier post, I had been under the impression that annuity rates were quite low, but I have now found that they are much higher than I imagined.