Annuity 5% increase per year or RPI

DRS1

grn99 said:

I'm probably missing something on the incremental % v RPI etc. and this could be a stupid question, but I'll ask anyway 

With this whole which increment (if any) we choose, the pot size is finite (other than whatever investment takes place) when it's used to purchase an annuity. So to my mind, regardless of level, 3%, RPI or something else, there is only so much money the actuaries will have calculated can be afforded by them?

So whichever escalator you put yourself on (and disregarding all the other protection options), the only way that same pot can give you those increments is by reducing the start point. Using real quotes I got, one example had £20,604 as my level annual, the 3% shows the start as £14,407 and 5% shows £10,919.

After 25 years these add up to £535,704.00 £555,433.68 and £558,107.80

Future RPI is obviously an unknown but the start point was £13,127.00

To my mind, that's not a huge variance after 25 years, between the increments. The only sure thing is a low start point and less money to play with in the first 15 years and if it does  match inflation all you're doing is maintaining that low start point in real terms....unless I'm missing something (and I probably am!!). Happy to have my interpretation corrected...

I don't think you have missed anything at all.

But you need to ask yourself why you are buying the annuity.  If it is to cover your basic living costs then you are going to be a bit worried if you start with a level annuity that is just enough because as inflation mounts just enough will turn into starvation wages before you know it.

You may say the level annuity can have a buffer but when will that buffer run out?

Now you may have another purpose to buying the annuity - giving you some money for luxuries (holidays fast cars whatever).  In that case a level annuity may make sense because the older you get the less likely you are to want those luxuries.  But then why buy an annuity at all why not just do drawdown?

Or you may be like me and have the old fashioned notion that your pension was to provide you with an income for your retirement and the best way to guarantee that is to buy an annuity.  No fussing with SWRs or worrying about what might happen to your investments.  No worrying that it will run out before you are finished.

LHW99

After 25 years these add up to £535,704.00 £555,433.68 and £558,107.80

Future RPI is obviously an unknown but the start point was £13,127.00

To my mind, that's not a huge variance after 25 years, between the increments. The only sure thing is a low start point and less money to play with in the first 15 years and if it does  match inflation all you're doing is maintaining that low start point in real terms....unless I'm missing something (and I probably am!!). Happy to have my interpretation corrected...

There is of course the unknown of how long you (hope to) live.

Depends on what age you take out the annuity, but if eg at 60, 25 years takes you to 85, around the average life expectancy for someone of 60.

However, if male you have a 1 in 4 chance of reaching 92, ie living a further 32 years. That could well result in a difference. And if you happen to be the one in ten who survive till 96, even more of a difference.

The insurers will calculate based on the average. Those who die early subsidise payments to those who beat the average.

grn99

Yes, I left out the mortality bit...good points.  I am at that 60 point though and the numbers will reflect that too.

Cobbler_tone

Unknown mortality is the answer to most pension based questions. What if you live to 100 and need care for 20 years at £2k a week? etc…the scenarios are endless and you have to take a realistic and pragmatic approach 

Secret2ndAccount

An annuity is an insurance product. You don't buy it to win the game. You buy it when you are 2-0 up with 20 minutes to play, and you don't want to snatch defeat from the jaws of victory.
So don't calculate what will happen in an average case. Actually do calculate that as a sanity check, then forget about it. Calculate what will happen if you live 20 years longer than you expect, and inflation is 2.5% higher than you expect the whole time.

Cobbler_tone

Secret2ndAccount said:

An annuity is an insurance product. You don't buy it to win the game. You buy it when you are 2-0 up with 20 minutes to play, and you don't want to snatch defeat from the jaws of victory.
So don't calculate what will happen in an average case. Actually do calculate that as a sanity check, then forget about it. Calculate what will happen if you live 20 years longer than you expect, and inflation is 2.5% higher than you expect the whole time.

Trouble is that many people don't have the fund to buy the lifetime annuity they might need. Then I guess it opens the debate of whether they can 'afford' to retire. Due to the multiple options to manage your fund, that opens up alternative successful strategies. Otherwise no-one would look beyond purchasing a lifetime annuity. I've said before, some people struggle to part with £500k for x amount PA.
It's common sense to state that a lifetime fully protected annuity is the best protection. It's why most DB schemes are still regarded as the gold standard.
The way I view it is that if you buy anything and die shortly after, you aren't going to care.

RogerPensionGuy

Reference picking term, level, fix% or an RPI annuity.

Reference cash flows throughout the retirement period, the gogo years, the no so gogo years and beyond whatever life has in store.

Maybe we can sorta treat annuities a bit like a flexing access drawdown SIPP, obviously annuities are mostly locked in (term with residual values are a bit different) but it's still possible to augment annuities a bit in my opinions.

How about this as an example with a 500K SIPP @ age 65.

100K 10year term annuity. 
200K life RPI annuity.
100K life 4% fixed annuity. 

100K in another annuity or maybe leave alone in a low cost SIPP to allow a tad of flexibility down the road.

***

I'm currently feeling annuity rates are sufficiently acceptable to use and they will remove/reduce volitilty/emotions down the road when my emotions are different from today and possibly much stronger than they are currently.

I'm lucky with a sensible DB in play and full state pension in a while and am currently warming to using 75/80% of SIPPs buying annuities and keeping 20/25% in a low cost SIPP for flexibility and possibly a dry powder store if/when we enter a big old market tumble. 

LookingForAnAnswer

aldershot said:

The problem with RPI annuities is they backload your returns. By definition, you'll get the highest nominal payment in the month (year) you die. Yes, they provide longevity insurance, but anecdotal experience is that cash is more fun in your 60s and 70s and tails off in your 80s and beyond. Be careful not to have too little whilst you can enjoy the benefit and end up with too much when it's too late. 

I've read this argument many times before. However all the old relations in my family have had a need for decent sums of money towards the end of the life. For carers, adapted furniture, house alterations, house moves, care home fees, taxis, meal deliveries, gardeners, handymen etc.

RogerPensionGuy

Just putting a bit of supplementary info on this thread, hopefully informative. 

I was lucky enough to get a face to face local appointment with an IFA today at very short notice. 

My annuity requests are pretty simple and a few points below that maybe helpful to some. 

I asked about RPI & 4% index only single life, no health or lifestyle issues thankfully with VP 100% or 30 years guarantee option. 

The offerings were very similar to moneyhelper and HL. 

I sampled a 400K single and 2 X 200K annuities of exactly the same data set, the 2 X 200K offering was better by just 0.15% and the IFA just said we would obviously go for the 2 X 200K offering, they didn't offer to make the 400K exactly the same. 

Reference the RPI offering, the best rates would allow payments to reduce if negative inflation occurs, I asked for a provider that doesn't ever reduce payments, the don't ever reduce payment took 2% off the offering unfortunately. 

The 200K X 2 offering is fine, but now trying to decide if that zero floor collar is worth a 2% less offering. 

I'm sure the money people have worked it all out and that's why they apply that 2% reduction approximately. 

The IFA did show me a level annuity with no VP or guarantees for reference information, think it produced a 40% higher offering, however I'm pretty fixed on RPI or possibly 4% in my head currently. 

So now my head is spinning picking more protections, zero collar to lock in future protections, balance and potential inheritance for children, however I'm not too fussed about any inheritance spill from this annuity vehicle. 

Just like always, any views, information or comments welcome. 

PS. IFA stated once deal is locked in, it just starts paying out from the day all total paperworks are fully completed, so if it took 21 days, it starts paying in 3 weeks, if it takes 42 days, it starts paying in 6 weeks time. I was surprised payments schedule value could not just pick say a date in the future like the 20th November and as long as all finds received by insurance company by the late date, the deal is the deal and I get payments as agreed even if the 1st month or two is delayed a bit. 

DRS1

Re the PS annuity quotes are usually guaranteed for a period of time sometimes it is 30 days sometimes longer (one of mine was guaranteed for 90 days).  If getting your paperwork and transferring the funds takes longer than the 30 day guarantee period then you need a new quote.

Obviously the new quote may not be a bad thing but it was something i was keen to avoid.