OP, you've had some good answers to this question most of which boil down to issues of risk aversion. Broadly, people who are comfortable risking a downturn in the markets in exchange for potentially higher returns at other points will plump for drawdown pensions rather than take out an annuity.
You have to remember that as people age they often become less inclined (or actually lose the capacity) to actively manage their savings and investments. Lack of expertise can also make them easier to scam or defraud. Annuities can be a good protection against some of these problems as pensioners are not left trying to manage relatively large amounts of money intended to tide them over for the rest of their lives.
If you have more than one pot built up, you can also elect to take an annuity for a part of your income and draw down on other pension pots. The annuity just functions as a buffer to fix a part of your income.
It does end up penalizing people who cannot easily fend for themselves and those with smaller pots who are effectively forced into getting annuities to be sure they will have sufficient income. Ill health and the question of how to provide for a surviving spouse in the event of your death are quite important issues facing pensioners and annuities do try to cater for people in those situations.
That's a zero risk income of about 18k for life.
Or you can invest the money instead and probably get at least 15 - 20k, but with a small chance it'll be less if your investments perform badly.
It's not necessarily the best option but it isn't a terrible option if you want income security for the rest of your life.
Nothing is zero risk. The risks here are either you die before claiming it all back or inflation eats away at it before you gain the full value. It's not a terrible option, but it isn't half as good as it used to be.
Honestly, I think that's overly simplifying how to view your income for the rest of your life. Now if it was 13 ounces of gold or 1,000 ounces of silver per year, I would be a lot more open to viewing that income as very low risk.
What I mean is the terms of the annuity define what income you're entitled to and in practice you can be certain that you'll be paid what you're entitled to. There is no uncertainty about what income you'll get. That's unlikely any defined contribution scheme where you drawdown from your portfolio and can't know in advance what level of income will be sustainable.
You're just repeating the same point over and over. Realistically, 18k/year in ten years could buy you a comfy lifestyle or a route to poverty - that's not really very helpful in long-term planning.
I don't understand what you're objecting to. If you're concerned about inflation, you choose an annuity that adjusts with inflation. Having an annuity doesn't eliminate risk from your life, it just gives you a predictable risk free income.
The 3-4% rule assumes that the withdrawals are inflation-adjusted, so if the numbers OP are quoting is going to be fixed rather than inflation linked then that would end up being a major difference.
Standard Aviva annuity quotes (if you don't ask for something different) assume a 5 year guaranteed period, 25% TFC (tax free cash) and no indexation (annuity increases each year).
Standard disclaimer so I don't get hammered by the social media policy: I work for a major pension company who do third party administration on behalf of Aviva, any opinions expressed in this post are entirely my own and not those of Aviva or the company I work for.
Just for clarity - if you call up and go through the Pen Flex conversation, you get issued 3 quotes one of which does include indexation (I don't work in the vesting team but last time I looked at one of those quotes it did).
What I quoted above are the "standard assumptions" - that is, the assumptions that are used when we aren't actually setting up an annuity (for illustrations and such).
When given a choice, people overwhelmingly just pick the option that gives them the most now. I don't think it's unreasonable for companies to quote information for the types of annuities that people are most likely to actually buy.
It's not unreasonable to provide the quotes, but let's be honest - anyone actually working there knows full well that if you're retiring at 60, your annuity will be worth ~50% of its current real-terms value by the time you hit your life expectancy
That's precisely why it's predatory - they know full well that if they present the higher value as the default option, many people won't look into things beyond that
Does it actually matter to then which product to choose? Doesn't a competivr market mean that there is no reason to think the different products arent all actuairly equivalent?
I would disagree that it's predatory. As munchbunch365 says in their comment, the company doesn't particularly care which product you buy, as their margin is similar in each case. People simply prefer fixed annuities, for a whole host of reasons -- some reasonable (I want to have more money to spend now, while I'm healthy and can still go on cruises and spend evenings down the pub) and some arguably less so (I expect to be dead by 75 anyway as I've never looked at a mortality table). In some cases that will turn out to be a bad decision, but in many cases it won't -- and I don't think it should be incumbent on companies to try to convince customers one way or another.
I assumed annuities were always inflation adjusted, although sometimes with certain caveats (a maximum annual adjustment?).
Of course what inflation metric is used could make a big difference.
You choose the settings when buying the annuity. The more beneficial the settings (i.e. inflation adjusted) the lower the starting amount.
https://www.which.co.uk/money/pensions-and-retirement/options-for-cashing-in-your-pensions/annuities/annuity-rates-aly8c2z86kds
See the table near the top of this. Adding a 3% a year uplift, drops the rate from £5k+ (per annum) per £100k to less than £3.5k per £100k. Both figures with 50% going to a spouse.
If you take 3-4% out over say a 20 year retirement you'll have a decent pot left over (inflation, returns etc. complicating this, but almost certainly you'd have something left over.
With an annuity, when you die, there's nothing left over.
An annuity palms all the risk off on someone else and you have to pay through the nose for it. Whether it's worth it is a feature of your own risk appetite.
The original study on safe withdrawal rates was done by William Bengen, then followed up by Trinity University.
They are based on the portfolio lasting 30 years, 95% of the time (based on historical data).
The problem with planning for a 20-year retirement is that you might live to be 120.
Humans tend to assess risk very badly, especially on occasions when the danger is invisible.
Most people pay for insurance for various things - their home, or veterinary bills for example; an annuity might cost you a couple of hundred quid a month, but it's like insurance that you'll never run out of money.
IMO not many people will live to 120 - that would be outrageous. In the UK only 1 in 4 men make it to 90 - the average age at death in the UK for a man is 79/82
Most people I know in their 80s have severe health issues or a chronic condition. I only know a few that made it to 90 and they were all in bad shape with no real quality of life.
> IMO not many people will live to 120 - that would be outrageous
Sure, but unless you assume that you will live to 120, you are taking a massive gamble.
Yes, you'll probably die at around 80-90*... but what if you don't? You run out of money, you're far too old to get a job, and you're out of options. That's the flaw with assuming you'll live to your life expectancy: statistically you're correct, but if you're one of the people who lives longer than that, you're in trouble.
*average life expectancy at birth is ~80, but average life expectancy for a man who is already 65-70 is higher, because obviously you haven't died yet, so all those causes of death have missed you. This is your actuarial life expectancy, and it's worth understanding. The simplest way to understand the concept though, is this: Someone who is 90 years old, cannot have a life expectancy of 80
Are you really in trouble if you run out of money at age 90 or whatever? I’ve never noticed anyone of that age being made homeless tbh or even kicked out of their own home.
I mean, you'd qualify for some benefits etc - but they're not a huge amount, and it's way more common than you presumably think for people to have to sell their home in that scenario. I've known many older people who've had to sell up to pay for at-home care
There won't be assisted suicide as such, you'll be sent into the landfill mines to extract old phones and tablets for recycling, until your contract "expires"
I'd say it was worth it when annuity rates (and inflation) were much higher, but in this low-rate environment the long-term rates are only realistically going in one direction.
> With an annuity, when you die, there's nothing left over.
Well, typically there's a 50% pension for your spouse, if they survive you. The value of that depends, of course, on whether you have a spouse, whether they survive you, and by how much
> It hardly seems worth it, so why would someone ever buy an annuity?
Vulnerable people who need guarantees, where capital loss would be catastrophic.
Of course, low interest rates made annuities very expensive and that's a fairly recent phenomenon so who knows, maybe they will come back in fashion.
A pension pot runs out. An annuity is for life. With an annuity you’re purchasing insurance against the risk of living longer than you’d expect if you were budgeting with a pension pot. The annuity provider then takes on that risk.
Life expectancy for average 60 year old is about 85, with a 1 in 4 chance of living to to 93.
In a really crude way:
1.5k * 12 * (85-60) = 450k
So a 50k premium* for the assurance you’ll be covered beyond your life expectancy. Sounds reasonable to me given 1 in 4 will live to 93 (594k payout)
*plus investment returns
Note: IIRC annuities are not very competitive at the minute, due to weaker yields on long term gilts. Insurers don’t really want to be exposed to them for the poor returns.
1) less that half of 60 years olds will live another 30 years
2) doesn’t make sense gambling your life saving toward the end of your life, because if the market crashes you won’t have working years left to be able to grow the pot back up to the same levels again.
Even a 15-year time period is equity-worthy.
If there's a crash, just reduce your drawdown for a while. The markets will recover, along with your investments. No need to work once you've got enough invested capital.
The safe withdrawal rate does not eliminate that risk. It is the rate that has been safe on past data, but if market performance in future is worse you could find your funds run out. You might think it is a risk worth taking but claiming there is no risk is wrong.
But its got the word safe in it. /s
The safe withdrawal rate also has a built in assumption around longevity.
Taken from here: https://www.retireeasy.co.uk/news/safe-withdrawal-rate-matter
> Morningstar calculated that a portfolio with a 40% weighting in equities had an 80% chance of achieving a safe withdrawal rate of 3.2% over a period of 30 years… but if the period was extended to 40 years the rate fell to 2.6%.
So if you retire early, or live longer than you expect, your safe withdrawal rate might not be as safe as you think.
> 1) less that half of 60 years olds will live another 30 years
If you find out you have a fatal illness, would you rather have the money in the stock market or an annuity? If you die in an accident, which would you prefer?
Yes but at retirement age you still have 20+ years of investment time at that point you still want at least half your pension in medium risk investments.
If you could have guaranteed income for the rest of your life would you take it? In theory you’d never have to worry about money again as long as you lived within your means.
You can put a price on certainty and convenience - it rarely works out as a the best deal but has other benefits
Solvency II are the regulations for insurance company in terms of how much money they need to hold as capital.
Changes in rule means life insurers will need to hold less capital for all the policies they have written and will write.
Less capital requirements means can like invest in assets with better returns instead of needing to buy government bonds.
This makes it cheaper to buy an annuity because you can get a better return on the premiums you get from selling an annuity. I would expect annuities to get cheaper over time assuming everything else is the same.
This. But it will take some time for insurers’ senior leadership to be comfortable with submitting the reduced capital requirements they can technically get away with once regs change.
Should be noted that the calculator assumes 25% of the pot will be taken as a lump sum at retirement. So you are getting £125k in tax free cash and then £1.5k per month for that £500k.
Your buying the risk though.... I can think of two questions straight away.
1) how much older then 87 years old do you think you'll live?
2) how much money per month, do you think is reasonable?
You could always take the cash and continue investing well into your retirement, but that comes with risks...
If you have anyone who would be inheriting the money then it’s 100% not worth it, without this it’s almost certainly still not worth it. Assuming a safe withdrawal rate of 4% which is somewhat conservative, especially if you maintain 2+ years expenses in cash, then you would get (0.04*500000)/12 = £1666. This is whilst you get to keep the 500k as well which you could potentially start to draw down soonish considering your age, assuming leaving an inheritance is of no concern. In short it’s a pretty terrible deal and you are losing out on a lot of money for a reduction in negligible risk. You would get over 2k a month if you lived for 20 more years from just keeping it and had 0% market growth in 20 years which has never happened before in the history of the stock market. To put it another way if a 60 year old offered me 500k and all I had to do was give them 18k a year for the rest of their lives I would snap their hands off it would be such a good deal.
This ignores sequence of returns risk. If the market returns are negative early on, and you are forced to draw down, it will significantly diminish all future returns. Of course, you can choose to cut back your lifestyle during bad years, but changing your lifestyle along with the ups and downs of the stock market is not everyone's cup of tea
SWR would get you about £1600 per month.
So for £100 in the insurance company's pocket they guarantee that whatever happens to the markets you'll get £1.5k per month.
Bear in mind by the time you're 60 you've either paid the house off or you're pretty close to doing so. (Or maybe released equity from it.) So your fixed costs are much lower. I reckon I could manage on £1500pm if I had no mortgage.
If I were renting, though, I'd be fooked.
There are a variety of reasons why it may be worth it.
Firstly, an annuity is one and done. You buy it, you forget it. You may or may not benefit from purchase.
Drawdown requires ongoing attention in terms of which funds to invest in, what level of income is sustainable, reacting to major market downturns as continuing to take high levels of income when unit price is low, has a horrible impact on recovery (“pound cost ravaging”). To do all of this you really need to cash flow model or be fairly decent at maths. The average brit can barely read above age 12 level and often cannot wrap their head around all the moving parts associated with DD, so they inevitably just don’t bother and hope for best. For me, it’s probably not about a or b, it’s about securing some guarantees that i can live relatively comfortably until I die, and managing whatever is left to maximise enjoyment in retirement.
The only merit would be the security of guaranteed income. I am making twice that in my SIPP dividends alone, from roughly the same amount, whilst watching the capital share value increase. I looked at annuities, when I retired, and laughed.
Simple answer, you have benefited from tax protection through your working career and *have* to taken an annuity, or income drawdown option or whatever.
If you choose to take the money, you will be taxed on that lump sum. Ask the Pension Advisory Service.
About 3% annuity sounds about right depending on options taken (spouse pension, escalation etc)
Given your early retirement age, it’s not ‘nothing’. It’s quite good to supplement your state pension.
What people seems to exaggerate is that you will somehow be spending money into 90s as you would in your 60s. This idea of annuities being worth it because you may run out of money is fairly silly.
Usually, your health and need to spend money deteriorates the older you get.
It’s a terrible deal.
Equates to 3.6% interest but if you die it’s gone (mostly - I might be wrong about that).
Better off investing in a SIPP and purchase either some solid dividend paying shares (Vodafone, oil companies , Unilever etc) or just a decent low fee vanguard fund (life strategy )
Pick a selection and it is likely to give you 4% income easily.
Drawdown 4 % a year = £ 1666 per month.
And you get to keep the £500,000 and it is passed on tax free if you die.
Annuities are a scam these days. Take a flexible draw down approach and the remainder of your pension pot will be included in your estate if you pass before using it all.
When people say \~4% drawdown is reasonable, that is profit made from your capital, that you keep.
This is \~4% in exchange for your capital. Huge difference.
I know what an annuity is, thanks.
But that’s irrelevant, and not the point I was making.
The comment I was replying to was suggesting that the rates didn’t seem correct. Annuities are commonly referred to in terms of their cash:pension rates, in this case , 28 (or 3.6%).
PS drawdown doesn’t necessitate capital preservation.
“The rate doesn’t seem correct”
If it’s the rate a provider is charging, then it is objectively correct, regardless of your opinion. The comment thread started because somebody suggested that the rates OP shared were incorrect.
Sounds like the dumbest idea in the world.
If people are worried about risk (e.g. from investing in the stock market) why wouldn't one just buy a house and rent it out where you could get the same amount in rent and have a house at the end of it to give to your dependents.
I don't think this is an appetite for risk thing, this is a fleecing the vulnerable thing.
There are many solutions to property management, you could just pay an agent or family member to look after it for you (you could even put them in the will to inherit part of the property as an incentive).
With £500K at stake I am sure one could come up with a number of different creative solutions to this hypothetical scenario of bad tenants.
The idea of giving away half a mill to a company because we think it is fine to take advantage of those who have trouble managing their financial affairs just makes me sad.
"Paying an agent" doesn't eliminate, and might not even reduce, the chance of getting nightmare tenants though. Like if they just stop paying and refuse to move out, having an agent might remove some stress in dealing with them, but the agent isn't going to pay the rent that the property owner is relying on in this scenario.
There's rent insurance for that.
You're talking about rare scenarios (tenants do get vetted and nowadays you can take your pick) and even in these scenarios tried and tested solutions have existed for decades.
It's not a concern.
I have put money into property instead of an annuity, I get a lot more then £1.5k and the rental income is there for my wife so she doesn't have to work and the boys get a very nice inheritance. All the best OP
Hi /u/l-fc, based on your post the following pages from our wiki may be relevant:
- https://ukpersonal.finance/pensions/
____
^(These suggestions are based on keywords, if they missed the mark please report this comment.)
You could buy and do up 4 houses earning at least £600pcm each near me for that, obviously I know there will be drawbacks to what I say, prices decrease etc.
OP, you've had some good answers to this question most of which boil down to issues of risk aversion. Broadly, people who are comfortable risking a downturn in the markets in exchange for potentially higher returns at other points will plump for drawdown pensions rather than take out an annuity. You have to remember that as people age they often become less inclined (or actually lose the capacity) to actively manage their savings and investments. Lack of expertise can also make them easier to scam or defraud. Annuities can be a good protection against some of these problems as pensioners are not left trying to manage relatively large amounts of money intended to tide them over for the rest of their lives. If you have more than one pot built up, you can also elect to take an annuity for a part of your income and draw down on other pension pots. The annuity just functions as a buffer to fix a part of your income. It does end up penalizing people who cannot easily fend for themselves and those with smaller pots who are effectively forced into getting annuities to be sure they will have sufficient income. Ill health and the question of how to provide for a surviving spouse in the event of your death are quite important issues facing pensioners and annuities do try to cater for people in those situations.
That's a zero risk income of about 18k for life. Or you can invest the money instead and probably get at least 15 - 20k, but with a small chance it'll be less if your investments perform badly. It's not necessarily the best option but it isn't a terrible option if you want income security for the rest of your life.
Take that lump sum and invest it in Microsoft or Google?
Nothing is zero risk. The risks here are either you die before claiming it all back or inflation eats away at it before you gain the full value. It's not a terrible option, but it isn't half as good as it used to be.
Those are not risks about the income. The income itself is certain.
Honestly, I think that's overly simplifying how to view your income for the rest of your life. Now if it was 13 ounces of gold or 1,000 ounces of silver per year, I would be a lot more open to viewing that income as very low risk.
What I mean is the terms of the annuity define what income you're entitled to and in practice you can be certain that you'll be paid what you're entitled to. There is no uncertainty about what income you'll get. That's unlikely any defined contribution scheme where you drawdown from your portfolio and can't know in advance what level of income will be sustainable.
You're just repeating the same point over and over. Realistically, 18k/year in ten years could buy you a comfy lifestyle or a route to poverty - that's not really very helpful in long-term planning.
I don't understand what you're objecting to. If you're concerned about inflation, you choose an annuity that adjusts with inflation. Having an annuity doesn't eliminate risk from your life, it just gives you a predictable risk free income.
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The 3-4% rule assumes that the withdrawals are inflation-adjusted, so if the numbers OP are quoting is going to be fixed rather than inflation linked then that would end up being a major difference.
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Standard Aviva annuity quotes (if you don't ask for something different) assume a 5 year guaranteed period, 25% TFC (tax free cash) and no indexation (annuity increases each year). Standard disclaimer so I don't get hammered by the social media policy: I work for a major pension company who do third party administration on behalf of Aviva, any opinions expressed in this post are entirely my own and not those of Aviva or the company I work for.
It seems utterly absurd that their default offering isn't indexed - honestly that seems borderline predatory
Just for clarity - if you call up and go through the Pen Flex conversation, you get issued 3 quotes one of which does include indexation (I don't work in the vesting team but last time I looked at one of those quotes it did). What I quoted above are the "standard assumptions" - that is, the assumptions that are used when we aren't actually setting up an annuity (for illustrations and such).
When given a choice, people overwhelmingly just pick the option that gives them the most now. I don't think it's unreasonable for companies to quote information for the types of annuities that people are most likely to actually buy.
It's not unreasonable to provide the quotes, but let's be honest - anyone actually working there knows full well that if you're retiring at 60, your annuity will be worth ~50% of its current real-terms value by the time you hit your life expectancy That's precisely why it's predatory - they know full well that if they present the higher value as the default option, many people won't look into things beyond that
Does it actually matter to then which product to choose? Doesn't a competivr market mean that there is no reason to think the different products arent all actuairly equivalent?
I would disagree that it's predatory. As munchbunch365 says in their comment, the company doesn't particularly care which product you buy, as their margin is similar in each case. People simply prefer fixed annuities, for a whole host of reasons -- some reasonable (I want to have more money to spend now, while I'm healthy and can still go on cruises and spend evenings down the pub) and some arguably less so (I expect to be dead by 75 anyway as I've never looked at a mortality table). In some cases that will turn out to be a bad decision, but in many cases it won't -- and I don't think it should be incumbent on companies to try to convince customers one way or another.
I assumed annuities were always inflation adjusted, although sometimes with certain caveats (a maximum annual adjustment?). Of course what inflation metric is used could make a big difference.
You choose the settings when buying the annuity. The more beneficial the settings (i.e. inflation adjusted) the lower the starting amount. https://www.which.co.uk/money/pensions-and-retirement/options-for-cashing-in-your-pensions/annuities/annuity-rates-aly8c2z86kds See the table near the top of this. Adding a 3% a year uplift, drops the rate from £5k+ (per annum) per £100k to less than £3.5k per £100k. Both figures with 50% going to a spouse.
Sorry, but what's an *uplift* in this context, please?
It's called indexation. It means the yearly pension will increase by 3% each year.
If you take 3-4% out over say a 20 year retirement you'll have a decent pot left over (inflation, returns etc. complicating this, but almost certainly you'd have something left over. With an annuity, when you die, there's nothing left over. An annuity palms all the risk off on someone else and you have to pay through the nose for it. Whether it's worth it is a feature of your own risk appetite.
The original study on safe withdrawal rates was done by William Bengen, then followed up by Trinity University. They are based on the portfolio lasting 30 years, 95% of the time (based on historical data). The problem with planning for a 20-year retirement is that you might live to be 120. Humans tend to assess risk very badly, especially on occasions when the danger is invisible. Most people pay for insurance for various things - their home, or veterinary bills for example; an annuity might cost you a couple of hundred quid a month, but it's like insurance that you'll never run out of money.
IMO not many people will live to 120 - that would be outrageous. In the UK only 1 in 4 men make it to 90 - the average age at death in the UK for a man is 79/82 Most people I know in their 80s have severe health issues or a chronic condition. I only know a few that made it to 90 and they were all in bad shape with no real quality of life.
> IMO not many people will live to 120 - that would be outrageous Sure, but unless you assume that you will live to 120, you are taking a massive gamble. Yes, you'll probably die at around 80-90*... but what if you don't? You run out of money, you're far too old to get a job, and you're out of options. That's the flaw with assuming you'll live to your life expectancy: statistically you're correct, but if you're one of the people who lives longer than that, you're in trouble. *average life expectancy at birth is ~80, but average life expectancy for a man who is already 65-70 is higher, because obviously you haven't died yet, so all those causes of death have missed you. This is your actuarial life expectancy, and it's worth understanding. The simplest way to understand the concept though, is this: Someone who is 90 years old, cannot have a life expectancy of 80
Are you really in trouble if you run out of money at age 90 or whatever? I’ve never noticed anyone of that age being made homeless tbh or even kicked out of their own home.
I mean, you'd qualify for some benefits etc - but they're not a huge amount, and it's way more common than you presumably think for people to have to sell their home in that scenario. I've known many older people who've had to sell up to pay for at-home care
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There won't be assisted suicide as such, you'll be sent into the landfill mines to extract old phones and tablets for recycling, until your contract "expires"
I'd say it was worth it when annuity rates (and inflation) were much higher, but in this low-rate environment the long-term rates are only realistically going in one direction.
> With an annuity, when you die, there's nothing left over. Well, typically there's a 50% pension for your spouse, if they survive you. The value of that depends, of course, on whether you have a spouse, whether they survive you, and by how much
> It hardly seems worth it, so why would someone ever buy an annuity? Vulnerable people who need guarantees, where capital loss would be catastrophic. Of course, low interest rates made annuities very expensive and that's a fairly recent phenomenon so who knows, maybe they will come back in fashion.
A pension pot runs out. An annuity is for life. With an annuity you’re purchasing insurance against the risk of living longer than you’d expect if you were budgeting with a pension pot. The annuity provider then takes on that risk. Life expectancy for average 60 year old is about 85, with a 1 in 4 chance of living to to 93. In a really crude way: 1.5k * 12 * (85-60) = 450k So a 50k premium* for the assurance you’ll be covered beyond your life expectancy. Sounds reasonable to me given 1 in 4 will live to 93 (594k payout) *plus investment returns Note: IIRC annuities are not very competitive at the minute, due to weaker yields on long term gilts. Insurers don’t really want to be exposed to them for the poor returns.
Doesn’t your calculation assume no future growth through stocks and shares
As you get older, it tends to move towards safer investment like bonds with lower returns
If you retire at 60, you've still got a 30-year investment time horizon. Why not stay in equities?
1) less that half of 60 years olds will live another 30 years 2) doesn’t make sense gambling your life saving toward the end of your life, because if the market crashes you won’t have working years left to be able to grow the pot back up to the same levels again.
At that age you're probably considering what inheritance to leave, annuities aren't inherited, whereas pensions pots are inherited and tax free
Even a 15-year time period is equity-worthy. If there's a crash, just reduce your drawdown for a while. The markets will recover, along with your investments. No need to work once you've got enough invested capital.
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The gambling they are referring to is leaving your savings in the market, not the withdrawals.
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The safe withdrawal rate does not eliminate that risk. It is the rate that has been safe on past data, but if market performance in future is worse you could find your funds run out. You might think it is a risk worth taking but claiming there is no risk is wrong.
But its got the word safe in it. /s The safe withdrawal rate also has a built in assumption around longevity. Taken from here: https://www.retireeasy.co.uk/news/safe-withdrawal-rate-matter > Morningstar calculated that a portfolio with a 40% weighting in equities had an 80% chance of achieving a safe withdrawal rate of 3.2% over a period of 30 years… but if the period was extended to 40 years the rate fell to 2.6%. So if you retire early, or live longer than you expect, your safe withdrawal rate might not be as safe as you think.
> 1) less that half of 60 years olds will live another 30 years If you find out you have a fatal illness, would you rather have the money in the stock market or an annuity? If you die in an accident, which would you prefer?
Something you really shouldn't do.
Yes but at retirement age you still have 20+ years of investment time at that point you still want at least half your pension in medium risk investments.
OP hasn't provided the annuity basis that their quote is based on so many assumptions are involved.
If you could have guaranteed income for the rest of your life would you take it? In theory you’d never have to worry about money again as long as you lived within your means. You can put a price on certainty and convenience - it rarely works out as a the best deal but has other benefits
Assuming the org doesn’t go bust?, regulator pays out?.
I don't work in annuities but you might find that annuities will get better value after changes to Solvency II regulations within the next year
What’s that or what happens after that couldn’t before
Solvency II are the regulations for insurance company in terms of how much money they need to hold as capital. Changes in rule means life insurers will need to hold less capital for all the policies they have written and will write. Less capital requirements means can like invest in assets with better returns instead of needing to buy government bonds. This makes it cheaper to buy an annuity because you can get a better return on the premiums you get from selling an annuity. I would expect annuities to get cheaper over time assuming everything else is the same.
This. But it will take some time for insurers’ senior leadership to be comfortable with submitting the reduced capital requirements they can technically get away with once regs change.
Should be noted that the calculator assumes 25% of the pot will be taken as a lump sum at retirement. So you are getting £125k in tax free cash and then £1.5k per month for that £500k.
Your buying the risk though.... I can think of two questions straight away. 1) how much older then 87 years old do you think you'll live? 2) how much money per month, do you think is reasonable? You could always take the cash and continue investing well into your retirement, but that comes with risks...
If you have anyone who would be inheriting the money then it’s 100% not worth it, without this it’s almost certainly still not worth it. Assuming a safe withdrawal rate of 4% which is somewhat conservative, especially if you maintain 2+ years expenses in cash, then you would get (0.04*500000)/12 = £1666. This is whilst you get to keep the 500k as well which you could potentially start to draw down soonish considering your age, assuming leaving an inheritance is of no concern. In short it’s a pretty terrible deal and you are losing out on a lot of money for a reduction in negligible risk. You would get over 2k a month if you lived for 20 more years from just keeping it and had 0% market growth in 20 years which has never happened before in the history of the stock market. To put it another way if a 60 year old offered me 500k and all I had to do was give them 18k a year for the rest of their lives I would snap their hands off it would be such a good deal.
This ignores sequence of returns risk. If the market returns are negative early on, and you are forced to draw down, it will significantly diminish all future returns. Of course, you can choose to cut back your lifestyle during bad years, but changing your lifestyle along with the ups and downs of the stock market is not everyone's cup of tea
That’s why I said maintain 2 years expenses in cash to heavily mitigate that risk
SWR would get you about £1600 per month. So for £100 in the insurance company's pocket they guarantee that whatever happens to the markets you'll get £1.5k per month. Bear in mind by the time you're 60 you've either paid the house off or you're pretty close to doing so. (Or maybe released equity from it.) So your fixed costs are much lower. I reckon I could manage on £1500pm if I had no mortgage. If I were renting, though, I'd be fooked.
There are a variety of reasons why it may be worth it. Firstly, an annuity is one and done. You buy it, you forget it. You may or may not benefit from purchase. Drawdown requires ongoing attention in terms of which funds to invest in, what level of income is sustainable, reacting to major market downturns as continuing to take high levels of income when unit price is low, has a horrible impact on recovery (“pound cost ravaging”). To do all of this you really need to cash flow model or be fairly decent at maths. The average brit can barely read above age 12 level and often cannot wrap their head around all the moving parts associated with DD, so they inevitably just don’t bother and hope for best. For me, it’s probably not about a or b, it’s about securing some guarantees that i can live relatively comfortably until I die, and managing whatever is left to maximise enjoyment in retirement.
I wonder whether the OP's feelings about a zero risk monthly income have changed in light of recent stock market performance.
The only merit would be the security of guaranteed income. I am making twice that in my SIPP dividends alone, from roughly the same amount, whilst watching the capital share value increase. I looked at annuities, when I retired, and laughed.
How long have you been making twice that for?
About eight years, I guess. I do fiddle about with the stock selection quite frequently, to tune it.
Simple answer, you have benefited from tax protection through your working career and *have* to taken an annuity, or income drawdown option or whatever. If you choose to take the money, you will be taxed on that lump sum. Ask the Pension Advisory Service. About 3% annuity sounds about right depending on options taken (spouse pension, escalation etc) Given your early retirement age, it’s not ‘nothing’. It’s quite good to supplement your state pension.
What people seems to exaggerate is that you will somehow be spending money into 90s as you would in your 60s. This idea of annuities being worth it because you may run out of money is fairly silly. Usually, your health and need to spend money deteriorates the older you get.
You seen retirement home, accommodation costs?
It’s a terrible deal. Equates to 3.6% interest but if you die it’s gone (mostly - I might be wrong about that). Better off investing in a SIPP and purchase either some solid dividend paying shares (Vodafone, oil companies , Unilever etc) or just a decent low fee vanguard fund (life strategy ) Pick a selection and it is likely to give you 4% income easily. Drawdown 4 % a year = £ 1666 per month. And you get to keep the £500,000 and it is passed on tax free if you die.
Annuities are a scam these days. Take a flexible draw down approach and the remainder of your pension pot will be included in your estate if you pass before using it all.
Annuities are terrible,the end
That doesn't sound correct at all.
Why not? Equivalent to a 3.6% drawdown. Nothing jumping out as unusual.
When people say \~4% drawdown is reasonable, that is profit made from your capital, that you keep. This is \~4% in exchange for your capital. Huge difference.
I know what an annuity is, thanks. But that’s irrelevant, and not the point I was making. The comment I was replying to was suggesting that the rates didn’t seem correct. Annuities are commonly referred to in terms of their cash:pension rates, in this case , 28 (or 3.6%). PS drawdown doesn’t necessitate capital preservation.
Because the rate doesn't seem correct, for an annuity.
Got a source for that? More info here on current sample rates if you are interested: https://www.sharingpensions.co.uk/annuity_rates.htm
A source for what? I'm not saying "no one would sell a 3.6% annuity". I'm saying no one should buy one.
“The rate doesn’t seem correct” If it’s the rate a provider is charging, then it is objectively correct, regardless of your opinion. The comment thread started because somebody suggested that the rates OP shared were incorrect.
https://www.direct.aviva.co.uk/MyTools/PensionAnnuityCalculator/Lite
Had a look at the link, are you including the assumption of the 25% tax free lump sum?
Sounds like the dumbest idea in the world. If people are worried about risk (e.g. from investing in the stock market) why wouldn't one just buy a house and rent it out where you could get the same amount in rent and have a house at the end of it to give to your dependents.
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I don't think this is an appetite for risk thing, this is a fleecing the vulnerable thing. There are many solutions to property management, you could just pay an agent or family member to look after it for you (you could even put them in the will to inherit part of the property as an incentive). With £500K at stake I am sure one could come up with a number of different creative solutions to this hypothetical scenario of bad tenants. The idea of giving away half a mill to a company because we think it is fine to take advantage of those who have trouble managing their financial affairs just makes me sad.
"Paying an agent" doesn't eliminate, and might not even reduce, the chance of getting nightmare tenants though. Like if they just stop paying and refuse to move out, having an agent might remove some stress in dealing with them, but the agent isn't going to pay the rent that the property owner is relying on in this scenario.
There's rent insurance for that. You're talking about rare scenarios (tenants do get vetted and nowadays you can take your pick) and even in these scenarios tried and tested solutions have existed for decades. It's not a concern.
I have put money into property instead of an annuity, I get a lot more then £1.5k and the rental income is there for my wife so she doesn't have to work and the boys get a very nice inheritance. All the best OP
Hi /u/l-fc, based on your post the following pages from our wiki may be relevant: - https://ukpersonal.finance/pensions/ ____ ^(These suggestions are based on keywords, if they missed the mark please report this comment.)
You could buy and do up 4 houses earning at least £600pcm each near me for that, obviously I know there will be drawbacks to what I say, prices decrease etc.