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Is it really worth it?
Comments
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I’ve always been of the opinion that an annuity would be a bad choice, but I must confess I am now less certain...
Based on an on-line calculator from a couple of annuity providers, they seem to be quoting me a figure of about 4.2%, which is a bit above the recent natural yield of my investment portfolio - ignoring capital growth. So on that basis alone, the annuity does not look great value, but not disastrous.
However what it would do is completely de-risk the retirement strategy. Annuity + small DB scheme + State Pension would roughly equal my current monthly (after tax) expenditure, leaving me my investment income to cover tax and the nice-to-have-but-not-essential “extras”. On that basis, the annuity is not looking so completely silly!0 -
Based on an on-line calculator from a couple of annuity providers, they seem to be quoting me a figure of about 4.2%, which is a bit above the recent natural yield of my investment portfolio - ignoring capital growth. So on that basis alone, the annuity does not look great value, but not disastrous.
But are you comparing like with like? 4.2%, is that a level annuity?0 -
If you're worried about getting your money back, you could always spend it quicker. But what happens if it runs out and you're still going strong?
Best not to think about how much you've paid in to be honest. With the tax 'bonus' plus your employer contribution, it's always going to be worth it.0 -
But are you comparing like with like? 4.2%, is that a level annuity?
Quite right! Tried again and the calculator gives me: 4.8% level, 3.0% for a 3% compound annual increase and 2.7% for increasing with RPI.
The point, though is that for some, even these rates may make sense in terms of balancing risk across different strands of retirement income. In my case, I have the small DB pension and the State Pension on the low-risk side and non-pension investments on the higher risk side. It’s a matter of where the DC pot should go. I’m not risk averse, so will most likely keep the DC pot invested and go for a flexible drawdown, but if I was not comfortable with investment risk, there would be a case for opting for an annuity.0 -
Doubleshotdamo wrote: »Thanks everyone for your answers. I tried a different calculator, and the figures were better in my favour. I suppose I should view the pension as a savings plan. The thing is, I know too many people who worked hard, paid into a pension, saved for old age, then died before retirement age. I'm a saver, and I spend wisely, but pensions are quite new to me and, I hate to admit, I don't really know too much about them. I'll have a read up on the one I have, and will keep paying in. Thanks.
I know many people who insure their house against fire but it never burned down. Should we all stop getting such house insurance ?
Perhaps think of it as an insurance policy against living longer than those other people you know.0 -
I’m not risk averse, so will most likely keep the DC pot invested and go for a flexible drawdown, but if I was not comfortable with investment risk, there would be a case for opting for an annuity.
Wouldn't it make better sense just of have a high allocation funds composed of bonds and gilts?
There's an enormous risk from non-indexed annuities that inflation will erode future income. An indexed-linked annuity on the other hand doesn't come anywhere close to the 3.5% drawdown suggested by the IFA."Real knowledge is to know the extent of one's ignorance" - Confucius0 -
Wouldn't it make better sense just of have a high allocation funds composed of bonds and gilts?
There's an enormous risk from non-indexed annuities that inflation will erode future income. An indexed-linked annuity on the other hand doesn't come anywhere close to the 3.5% drawdown suggested by the IFA.
I’m not sure that a portfolio with a high allocation of bonds and gilts could achieve an inflation linked 2.7% return and a 3.5% drawdown presupposes a reasonable level of risk tolerance and adaptability. My point remains that for the risk averse, who want certainty about their income for potentially 40 years of retirement, an annuity still has an attraction.0 -
Wouldn't it make better sense just of have a high allocation funds composed of bonds and gilts?
There's an enormous risk from non-indexed annuities that inflation will erode future income. An indexed-linked annuity on the other hand doesn't come anywhere close to the 3.5% drawdown suggested by the IFA.
An annuity can't be exhausted, and provides efficient risk pooling.Thus the old Gentleman ended his Harangue. The People heard it, and approved the Doctrine, and immediately practised the Contrary, just as if it had been a common Sermon; for the Vendue opened ...THE WAY TO WEALTH, Benjamin Franklin, 1758 AD0 -
This site is worth a read as the author looks at various retirement strategies, and he favours the 'floor and upside' approach where you annuitize enough of your pot to provide a guaranteed safety net for your minimum needs and invest the rest. It is a US site, so there are different factors in play such as healthcare costs, but it is still interesting.
http://www.theretirementcafe.com/2018/01/unraveling-retirement-strategies-floor.html0 -
This site is worth a read as the author looks at various retirement strategies, and he favours the 'floor and upside' approach where you annuitize enough of your pot to provide a guaranteed safety net for your minimum needs and invest the rest. It is a US site, so there are different factors in play such as healthcare costs, but it is still interesting.
The main different factor in play in the US is that retirees don't get as generous a level of inflation-linked guaranteed basic income as ours do from the State Pension.
This creates a much bigger demand for annuities than exists over here. As you say, healthcare costs in the US boost the demand for secure income in retirement still further.
£17,000 a year (for a couple with a full NI record) plus your healthcare costs covers a lot of basic needs for anyone who isn't loaded. After that you have to be at the extreme end of risk-averse to not be able to cover the risk of stockmarket crashes and pound cost ravaging with a cash float.0
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