Annuities - safer and better? Bamboozled!

Cash_Cow

My head is spinning trying to predict the future amidst everything and amidst my reticence to have unknown things affecting my future due to stock market volatility and the actions of Trump and Putin and China etc 

So I have 639,000 that can go into an annuity (some from pension and some from a house sale) which seems to give about £42,500 pa which is a yield of 6.65%.  Not brilliant but a risk free known, which I like. I'd hope to draw on that for maybe 25 yrs which is over a million in return.  Looks even better.  Add in state pension and I can easily manage on £54k pa but I do note the annuity isn't index linked so it will buy about half less in 15 years? 

Sorry i'm rambling as I cant get my head around it at this early stage of thinking - any pointers or input gratefully received.  

FIREDreamer

Try looking at quotes for index linked annuities - may get 4.5% as an annuity rate but will go up within inflation.

Cash_Cow

Thanks - I will of course get proper advice but I have to start my own ball rolling a bit first!

Easyjet77

Cash_Cow said:

My head is spinning trying to predict the future amidst everything and amidst my reticence to have unknown things affecting my future due to stock market volatility and the actions of Trump and Putin and China etc 

So I have 639,000 that can go into an annuity (some from pension and some from a house sale) which seems to give about £42,500 pa which is a yield of 6.65%.  Not brilliant but a risk free known, which I like. I'd hope to draw on that for maybe 25 yrs which is over a million in return.  Looks even better.  Add in state pension and I can easily manage on £54k pa but I do note the annuity isn't index linked so it will buy about half less in 15 years? 

Sorry i'm rambling as I cant get my head around it at this early stage of thinking - any pointers or input gratefully received.  

My investments, mostly global trackers, have performed well in the period since president Trump  was elected. "Stock market volatility " is not a new phenomenon and is highly unlikely to disappear. 
       Index link annuity may be a worry free option to alleviate concerns.
Regards

DRS1

Cash_Cow said:

Thanks - I will of course get proper advice but I have to start my own ball rolling a bit first!

Plenty of threads on here about annuities - have a read.  There is one on RPI or 5% increases which has a useful post by @OldScientist about the differences between flat annuities and RPI linked ones.

Annuity 5% increase per year or RPI - Page 3 — MoneySavingExpert Forum

Annuities aren't the only game in town.  Read up about drawdown and UFPLS and the investment strategies people adopt for that route.  Plenty of people follow those routes for their own very good reasons.  They give you much more flexibility than an annuity.

But also think about how much money you need and where it will come from.  Do you have other savings or investments eg in ISAs.  And when will you need it - eg will you have a gap to bridge between when you stop work and the state pension kicking in.  So you may want more money in that period and less afterwards.

El_Torro

You mention £639k as your pot, partly from a pension and partly from a house sale. While it's possible to buy an annuity with money that isn't in a pension it is a relatively niche product by comparison. Normally people take their 25% tax free lump sum from a pension and buy an annuity with what's left. Better to use taxable money to buy an annuity than tax free money after all. If you do want to use all the money for an annuity you will probably have to buy two separate annuities. 

I agree with those who are saying that an inflation linked annuity is probably the way to go. You can buy an annuity that doesn't increase every year but (in my mind) that kind of defeats the purpose of going down the relatively safe route of an annuity.

QrizB

Cash_Cow said:

 Add in state pension and I can easily manage on £54k pa but I do note the annuity isn't index linked so it will buy about half less in 15 years?

I'd hope most people could "easily manage" on £54k pa, it's about 150% of average full-time wages.

One approach that works for some people is to work out how much annual income you need to have your minimum acceptable lifestyle. Housed, fed, clothed, the basics. Then make sure you have a combination of guaranteed income - stare pension, index-linked annuity, DB pension (if you're lucky enough to have one) - to meet that minimum without any active intervention.

Than whatever is left over in your pension you can invest at a higher level of risk, as you have the safety net of having your basic needs met.

Bostonerimus1

Be careful with your terminology. Your 6.65% is the payout rate of the annuity and if you take payments for 25 years the implied Internal Rate of Return of 4.3%. Of course the longer you live the better the IRR as you get more and more lifetime income. You should be thinking about an RPI annuity quote and whether you want to guarantee income for some number of years to protect any dependents or heirs. You also might think of doing a partial annuitization so that you have the flexibility of keeping some capital.