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.

OldScientist

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.  

Your question "Annuities - safer and better?" might elicit the response, 'safer and better than what?'

For example, for a 65yo single retiree:

1) A level annuity currently has a payout rate of 7.8% (e.g., see https://www.williamburrows.com/calculators/annuity-tables/ ), but will be affected by inflation. For example, during the 1970s, prices increased by a factor of just over 3 meaning the real value of income from a level annuity would have fallen by two thirds over that decade, i.e., your £42k would have been be worth £14k in real terms.

2) An RPI annuity currently has a payout rate of 5.3%, so the initial income is lower, but will remain constant, in real terms, with inflation for life.

Building a collapsing ladder of inflation linked gilts forms a more complex guaranteed income alternative to an annuity (a 35 year ladder taking the retiree to 100yo, would have a payout rate of about 3.9%, see https://lategenxer.streamlit.app/Gilt_Ladder).

So-called 'safe' withdrawal rates (i.e., constant, inflation adjusted withdrawals from the portfolio) were, historically, in the range 3.0 to 3.5% for the UK.

There are some extreme risks that annuities, which are underpinned by corporate bonds, gilts, and various other securities, are exposed to, e.g. government default, that means complete annuitisation might be unwise from the perspective of diversification. On the other hand, markets are normally volatile and also risky under extreme conditions.

You imply that £54k per year would be more than enough, so one planning approach is to consider what income do you actually need in retirement and, together with state pension, limit annuitisation to that value. For example, assuming you decided you could support your required lifestyle on £32k per year, this means you would, as an upper limit, need £20k income in addition to the SP requiring (at 5% payout rate) annuitisation of £400k of your portfolio. The remaining portfolio (i.e., £240k) could then be used to support ad-hoc spending, fun stuff in good markets, legacy, etc.

In general to attempt to predict the future behaviour of markets is futile. In the absence of such foreknowledge, diversification across different assets at least allows the retiree to get some decisions right (and some wrong!).

Albermarle

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 

I think a step back and a deep breath is needed.

There is no point making your head spin trying to predict the future, as that is basically impossible to do.
There will also always be unknown things that could affect your future in many different ways. Same for everybody.

Also you need to put current global events in perspective. As they are happening now, they seem more important/overwhelming than things that have happened in the past or will happen in the future. There is even a name for it 'recency bias' . There have always been wars, global tensions etc and there always will be.

a yield of 6.65%.  Not brilliant but a risk free known

Current annuity rates are much higher than they have been for many years, hence the much increased interest in them.

As the previous poster said, it is a valid strategy to work out what you need to basically live on, and use an annuity and the state pension to secure that.
Then you can take your 'fun money' out of your remaining pension pot/savings and not have to worry too much if it goes up and down over the years.

ali_bear

Recommendation from me would be to take an RPI-linked annuity that, together with your state pension, is enough to cover all of your regular monthly living costs. Or maybe that plus a bit more. You would need to work out what that is currently. 

Your remaining funds can be drawn upon as and when needed. Including some for the period between now and when your state pension kicks in.