Annuities as part of pension planning

username12345678

DRS1 said:

username12345678 said:

DRS1 said:

If you have health issues then these can be reflected in the annuity rates you get quoted.

If you want to factor state pension into the mix then get a mix of fixed term and lifetime annuities.  So the fixed term one would expire when your SP kicks in and would mirror the amount of SP you would get.  The triple lock may mess up the calculations because you won't get those increases from an annuity. but if you just get a fixed term annuity paying today's state pension amount that should be OK.  You might get a nice bump in income when the state pension starts.

But if you already have a ladder of gilts why are you looking at an annuity?  You could just live off the gilt ladder as each step matures.

I would be comfortable sticking with my gilt ladder plan as it is.

An RPI linked annuity does have a couple of possible benefits (for me anyway). The certainty and simplicity mainly; but also in the unlikely event that my longevity is a family outlier.

The flip side of course is losing the flexibility around drawing income which like most retirees is unlikely to be a constant, along with the question of whether the total income is likely to be as much with an annuity as a gilt ladder.

As you and other people have pointed out the benefit of the annuity is the longevity issue.  If you set up a 30 year gilt ladder and live off that what do you do if you make it to year 31?  With the annuity you're fine.  On the other hand if you don't make it past year 2 your heirs still have the rest of the gilt ladder but with the annuity that is gone (assuming it is a single life annuity with no guarantee period or protected amount).

But you seem to be sensibly looking at only spending part of the pot on an annuity and having the rest available for drawdown as and when needed.  If you followed my mix and match suggestion with a fixed term annuity you would probably have a fair bit more left in the drawdown pot.

My thinking is that I wouldn’t want to buy an annuity that would cross in to the higher rate band. Just below with a little bit of headroom for fiscal drag feels a more efficient option from a tax viewpoint.

If I did need more occasionally then I could use the ISA/GIA to supplement whilst leaving the rest of the SIPP alone.

username12345678

Bostonerimus1 said:

I've been retired for 10 years and have an index linked DB pension and one of the great benefits is that I get a monthly check without having to think about anything (particularly the markets). That goes a long way to control my BP. Of course you can do something similar with a gilt ladder. 

The size of your annuity/gilt ladder is going to be determined by your other sources of income and spending, but once you have that covered from reliable sources you might consider being aggressive with your remaining money, safe in the knowledge that the ups and downs of the markets won't affect your lifestyle.

There’s no question that long term history shows that being invested in equities will provide the best protection from inflation…it’s the inevitable bumps in the road that in all honesty I would rather avoid even though that comes with a cost.

Although that said, research (Boglehead thread) showed that equity allocations from around 30% to 85% supported quite similar SWR’s…just the terminal wealth may be different…which isn’t a concern personally.

username12345678

kempiejon said:

A perennial question round our way.
It looks like you'll have enough, not enough equity and other assets for my taste but you will know your reaction to market volatility.
How has the pot been growing so far?
Moving from accumulating to spending many find hard. An annuity removes a decision of what to sell and how much. Many like the idea of an inflation linked pension, it gives a certainty about some of the income. Current thinking is I can get a better return and leave a pot by going alone but I temper that with I can't always be lucky. In a year or two I'll look again at annuitising some of the pot for a base income to cover costs but not full spend.
What is the yield on the gilt ladder? 

Performance: 

2024:  6.6%

2025:  6.5%


The nominal ladder is 4%-4.5% (average towards the upper end)

Linkers are on a real yield of between 1% and 2% depending on duration.

OldScientist

username12345678 said:

OldScientist said:

While you have no legacy requirements, do you have a spouse (I note that the annuity rates you've quoted are for single life)?

One approach is to consider the long term first, i.e., post-67 when SP is in payment and buy sufficient annuity income to achieve your long term income requirements.

Then consider the bridging period to SP,  i.e., the period from 55-67 in your case, and construct a gilt ladder to provide a proportion or all of the required income.

For example, if '2%' was £20k (implying a pot of £1m), then in the long-term you'd need to add about £8k annuity income in addition to the state pension (with a cost of £200k, assuming a payout rate of 4%).

To construct a a 12 year gilt ladder providing £20k per year to start in 2 years time would currently cost about £220k.

For this example, about 40% of the pot is required to provide sufficient income for life. The rest can be left invested to provide ad-hoc income.

Obviously, if the '2%' is more than £20k, then the relative cost of the annuity will increase since the SP is a fixed amount.

IMV, in a comparison of an RPI annuity with a level one, for the cautious retiree it is the downside of the level annuity that is problematic. If high inflation shows up, then the initial advantage the level annuity has will soon disappear (e.g., the 1970s saw annualised inflation of just over 12% and slightly more than a threefold increase in prices during that decade - many 'crossover' calculations assume inflation is constant with relatively low values of 2%, 3%, 5% or so).

No spouse and no children so no need for a joint life annuity or inheritance consideration.

The gilt ladder as it stands is more heavily weighted to longer duration ILG’s with the last redemption at age 75 at which point my plan originally was to buy an annuity with whatever was in my SIPP.

My thinking with an RPI annuity is that it protects from the worst case inflation scenarios albeit at some front loaded cost. I value certainty but not to the point that it is unreasonable, it’s finding the balance.

Makes sense then.

I note that the outcome of delaying the annuity purchase can be more, less or the same income as buying it now. Annuity rates will almost certainly go up with age (although that depends on yields), but the size of SIPP depends on future returns and withdrawals so could (in real terms) be more or less than now.

'Finding the balance' is definitely an individual choice and puts the 'personal' in personal finance!

FWIW, all of our core expenditure and much of our adaptive expenditure is provided by a (largely) CPI-adjusted DB pension with variable portfolio withdrawals providing income to cover additional discretionary expenditure. Similarly to @bostonerimus1 above, having that regular income satisfies this particular cautious retiree.

DRS1

username12345678 said:

DRS1 said:

username12345678 said:

DRS1 said:

If you have health issues then these can be reflected in the annuity rates you get quoted.

If you want to factor state pension into the mix then get a mix of fixed term and lifetime annuities.  So the fixed term one would expire when your SP kicks in and would mirror the amount of SP you would get.  The triple lock may mess up the calculations because you won't get those increases from an annuity. but if you just get a fixed term annuity paying today's state pension amount that should be OK.  You might get a nice bump in income when the state pension starts.

But if you already have a ladder of gilts why are you looking at an annuity?  You could just live off the gilt ladder as each step matures.

I would be comfortable sticking with my gilt ladder plan as it is.

An RPI linked annuity does have a couple of possible benefits (for me anyway). The certainty and simplicity mainly; but also in the unlikely event that my longevity is a family outlier.

The flip side of course is losing the flexibility around drawing income which like most retirees is unlikely to be a constant, along with the question of whether the total income is likely to be as much with an annuity as a gilt ladder.

As you and other people have pointed out the benefit of the annuity is the longevity issue.  If you set up a 30 year gilt ladder and live off that what do you do if you make it to year 31?  With the annuity you're fine.  On the other hand if you don't make it past year 2 your heirs still have the rest of the gilt ladder but with the annuity that is gone (assuming it is a single life annuity with no guarantee period or protected amount).

But you seem to be sensibly looking at only spending part of the pot on an annuity and having the rest available for drawdown as and when needed.  If you followed my mix and match suggestion with a fixed term annuity you would probably have a fair bit more left in the drawdown pot.

My thinking is that I wouldn’t want to buy an annuity that would cross in to the higher rate band. Just below with a little bit of headroom for fiscal drag feels a more efficient option from a tax viewpoint.

If I did need more occasionally then I could use the ISA/GIA to supplement whilst leaving the rest of the SIPP alone.

It is interesting how many people on here want to structure their income so it falls below a tax threshold.  That can be achieved with drawdown but it is much more difficult if you buy an increasing annuity.  We know thresholds are fixed for some years but who knows if they will increase at the same rate as the annuity when (if) they start going up again?

You have probably worked out the figure you need to cover the bills and it may make sense to use that as your start point for the annuity rather than some tax threshold figure which may or may not be more than you need right now.

Yes I suppose it can be attractive to take the "excess" now at basic rate and squirrel it away in an ISA for the future.  But you could do that with drawdown without running the risk that your annual annuity increases take you into the higher rate band  because of outside factors over which you have no control.

JoeCrystal

DRS1 said:

It is interesting how many people on here want to structure their income so it falls below a tax threshold.  That can be achieved with drawdown but it is much more difficult if you buy an increasing annuity.  We know thresholds are fixed for some years but who knows if they will increase at the same rate as the annuity when (if) they start going up again?

You have probably worked out the figure you need to cover the bills and it may make sense to use that as your start point for the annuity rather than some tax threshold figure which may or may not be more than you need right now.

Yes I suppose it can be attractive to take the "excess" now at basic rate and squirrel it away in an ISA for the future.  But you could do that with drawdown without running the risk that your annual annuity increases take you into the higher rate band  because of outside factors over which you have no control.

If only there is a way to ask for annuity that pay you up to tax free allowance minus the state pension! 

ali_bear

Annuity is central to my plan. At some point in '26 I will cash in about half of my DC fund to buy an annuity, designed to cover my basic living costs for life. The remainder will stay invested, mostly in equities, to be drawn upon as and when. I'll have a large TFLS on my hands, but some of that will be used to build an index-linked gilt ladder to fill the gap until state pension kicks in. 

Bostonerimus1

username12345678 said:

Bostonerimus1 said:

I've been retired for 10 years and have an index linked DB pension and one of the great benefits is that I get a monthly check without having to think about anything (particularly the markets). That goes a long way to control my BP. Of course you can do something similar with a gilt ladder. 

The size of your annuity/gilt ladder is going to be determined by your other sources of income and spending, but once you have that covered from reliable sources you might consider being aggressive with your remaining money, safe in the knowledge that the ups and downs of the markets won't affect your lifestyle.

There’s no question that long term history shows that being invested in equities will provide the best protection from inflation…it’s the inevitable bumps in the road that in all honesty I would rather avoid even though that comes with a cost.

Although that said, research (Boglehead thread) showed that equity allocations from around 30% to 85% supported quite similar SWR’s…just the terminal wealth may be different…which isn’t a concern personally.

If your income is covered by an annuity or gilt ladder you don't need to worry about the "inevitable bumps". Not worrying about your terminal wealth is also another argument for taking more risk. Of course you could also spin it the other way and just put everything in cash and bonds because you have your income needs covered and don't need much growth. So you are in the enviable position of having choices, but I would advise you not to look at the balance of your portfolio much because retirement is happier when you don't worry about money...that's true financial independence.

af1963

JoeCrystal said:

DRS1 said:

It is interesting how many people on here want to structure their income so it falls below a tax threshold.  That can be achieved with drawdown but it is much more difficult if you buy an increasing annuity.  We know thresholds are fixed for some years but who knows if they will increase at the same rate as the annuity when (if) they start going up again?

You have probably worked out the figure you need to cover the bills and it may make sense to use that as your start point for the annuity rather than some tax threshold figure which may or may not be more than you need right now.

Yes I suppose it can be attractive to take the "excess" now at basic rate and squirrel it away in an ISA for the future.  But you could do that with drawdown without running the risk that your annual annuity increases take you into the higher rate band  because of outside factors over which you have no control.

If only there is a way to ask for annuity that pay you up to tax free allowance minus the state pension! 

Very soon, for anyone with a full new state pension, that figure will be negative.