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Buying annuities

Including Financial Independence and Retiring Early (FIRE)
qwertybob
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Buying annuities

#532531

Postby qwertybob » September 26th, 2022, 6:28 pm

I'm a bit shy, so I'm not using my normal foolish login. I thought I'd post this as it's always good to hear other people's views. Quite often merely writing down silly questions makes things clearer I find.

Quick summary:
I'm 55 next year, and I'd like to wind down to retirement. I work part-time. My other half works, but doesn't earn a great deal
Expected future pensions (for two of us) at normal retirement age:
2 x state pension; 2 small final salary index linked schemes. Total: c. £25-26k p.a. income in today's terms
Plus a very small SIPP

We also have c. £3m between us (not performed brilliantly this year), a bit over half in ISAs
I know £3m looks plenty to supply the rest of our income, but it doesn't stop me lying away at night worrying about disasters caused by bad investment choices, inflation, wars, economic or natural catastrophes.

Annuity rates are going up a bit . If I could purchase an inflation-linked income of, maybe, £6-£8000 a year at the age of 55-ish, that would raise our predictable pension income to say £33k, which seems useful, and maybe help with the sleep.
Hargreaves Lansdown have a page that it won't let me link to here, with a current best rate of 2.5% for such a plan. Pretty awful, but better than it was, and I suspect it may be be higher again in 6 months, or even next week.

It appears I can buy an annuity outside the SIPP (not enough in the SIPP). I wonder if anyone would sell me an RPI (or even CPI) linked annuity this way. I haven't found such a product from googling but it may exist.

It looks as though I can't easily contact providers directly. Would I have to phone round IFAs to get quotes if I decided to do this, or is there another way?

Or is the whole thing a terrible idea, given that we do have £3m, and even a 1.5% return on that would keep us going?

Sobraon
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Re: Buying annuities

#532536

Postby Sobraon » September 26th, 2022, 6:40 pm

HMG's Money Helper site (first google result) has a good tool for comparing annuities. I have just put in figures based on your age and guess at health and pot size and it looks like £215/Month for £100000 at 55 -YMMV!
(edit to add I may have misinterpreted your aim but if anyone hasn't seen the Money Helper tool it may be of interest)

Alaric
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Re: Buying annuities

#532547

Postby Alaric » September 26th, 2022, 7:31 pm

qwertybob wrote:It appears I can buy an annuity outside the SIPP (not enough in the SIPP). I wonder if anyone would sell me an RPI (or even CPI) linked annuity this way. I haven't found such a product from googling but it may exist.


Your keywords will be "Purchased Life Annuity". There's a handful of Companies offering these, but they only seem to offer level annuities or annuities that increase at a fixed rate. I would expect as well that they would be reluctant to deal direct and insist you went through an IFA. Part of the resulting annuity will be treated as a return of capital, so the income tax is likely to be lower than if you were able to spend the same amount with SIPP assets.

Snakey
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Re: Buying annuities

#532752

Postby Snakey » September 27th, 2022, 2:25 pm

Do you really think that your £3m investments are ever going to do so badly they won't return £8-9k a year? That's surely a disaster scenario in which an annuity wouldn't pay out either - or any of your pensions for that matter - and if they did you wouldn't be able to get that bag of shopping back from the supermarket safely.

I'm 50, already given up work, and I have £1.1m in my pension and around £500k outside it (ISA, GIA, PBs, cash savings, and some awful EIS investments I wish I'd never bought), so my position is the same as yours since I'm not one half of a couple. I watch the UK's latest bout of self-immolation with a measure of trepidation, but only because I wanted to "win" the sequence of returns lottery and make smug posts in perpetuity and already my wheels have come off. But the whole point of these plans is that they still work even through the bad times. I may end up less comfortable than the top end of my Plan A but I have no actual fears of starving in the gutter, or if I do I'll be curled up down there with so many other people it'll at least be warm. Same for you, too, no?

It'd cost about a quarter of a million for me to buy an annuity to provide an index-linked income equivalent to the "small" final salary pensions you've already got. It'd probably cost you the same to get the extra you want. I believe the general advice for these things is to wait as long as you can before buying one, which must be true in spades if interest rates are going to do what they're currently forecasting. I suppose for you the point is that you worry a permanent 90% crash is imminent and so if you don't do it now you might not be able to afford it at all? But then you imply that you might wait a few weeks or months, so... are you saying there could be a terrible crash but it definitely won't happen yet? It's all getting terribly specific! Maybe spend some of it on building a machine to administer a swift kick up the backside whenever it senses your small-hours brain starting to ruminate.

qwertybob
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Re: Buying annuities

#532768

Postby qwertybob » September 27th, 2022, 3:43 pm

Thanks snakey. Harsh but fair, and that's ok. That's what my post was for. We could sustain a two-thirds fall in real value, and a 3% return would still see us through.
You are probably right. My scheme would really save us only at the extremes where our portfolio fell by 75% or thereabouts. Maybe I simply need to change my evening beverage instead. But for some reason a corner of my brain is still trying to tell me that it's a sensible risk-reduction.

JohnW
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Re: Buying annuities

#532870

Postby JohnW » September 27th, 2022, 11:18 pm

Your state of mind, ‘worried about income security despite generous savings’, is more common than some detractors allow for, and even if it’s rare if it’s yours it’s legitimate. Now, what to do?
There’s a lot of mental comfort with retirement income streams like state pensions and inflation linked annuities. But you can add to that short list a non-rolling bond ladder of linkers. You buy a bunch of different maturity linkers that pay coupons every few months and return your principal as each matures. Buy the right combination and you can get a steady if somewhat lumpy drip feed of inflation protected income for any future period you choose, with the advantage that you can bail out any time (unlike a lifetime annuity, but both would be a good choice).
At the moment linkers are have positive yields, so what’s not to like about that?

DrFfybes
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Re: Buying annuities

#533007

Postby DrFfybes » September 28th, 2022, 12:01 pm

Basically, it is your monehy, do what makes you feel most confortable.

If you want to buy a guaranteed income, then if that settles you then do it. The point of retirement is to enjoy yourself, not fret about money.

Now financially it is probably not the brst decision, you have more than adequate funding to go down other routes, but if you KNOW you are covered, it allows you to take more risk with the other savings without overworrying about the income.

Go to any advisor and the first thing they do is assess your attitude to risk. You need to do the same and act on it.

Paul

GeoffF100
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Re: Buying annuities

#533597

Postby GeoffF100 » September 30th, 2022, 9:51 am

An index linked annuity is a perfectly sensible option. The is no shortage of optimists on this board, but they may not be right. Even if they are, peace of mind is beyond price. Index linked gilt prices have been falling steeply recently. I expect that index linked annuity rates will increase steeply in response.

eventide
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Re: Buying annuities

#533637

Postby eventide » September 30th, 2022, 11:24 am

A bit doomsterish from me but you have to ascribe a non zero probability of your state pensions being means tested by the time you are eligible. And you'd obviously not be eligible. So considering locking other forms of income from a pot may have other benefits.

And to all those who say "but I've paid in etc etc". You paid in to national *insurance*. The second word is important here. If I was Keir Starmer with a 200 seat majority I'd immediately means test it to zero for anyone with liquid assets of over [pick your own number but it aint over £3m], and say its an insurance scheme and will get paid if you need it. Same with child benefit, heating allowance for wealthy grannies etc. There are literally tems of billions of low hanging fruit which dont require them to have to commit on income tax, or be accused of introducing a wealth tax (which of course it would be). These are the questions I hope they start getting asked about in the run up to an election, not "are you going to reinstate the 45p rate".

tjh290633
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Re: Buying annuities

#533643

Postby tjh290633 » September 30th, 2022, 11:39 am

GeoffF100 wrote:An index linked annuity is a perfectly sensible option. The is no shortage of optimists on this board, but they may not be right. Even if they are, peace of mind is beyond price. Index linked gilt prices have been falling steeply recently. I expect that index linked annuity rates will increase steeply in response.

I have one, but it is limited to a maximum of 5%p.a. increase. When the RPI fell, it stayed level, then resumed tracking the RPI when it rose above the previous level. Whether it will do the same with a rise above 5% remains to be seen. I live in hope that it will.

Does anyone know what an index-linked annuity would cost these days? I did have a source of such information, but it seems to have died. From https://www.moneymarketing.co.uk/opinio ... 20increase.

From 1 September 2021 to 1 September 2022 annuity rates have jumped by nearly 50%. During this period, the benchmark annuity (£100,000 annuity, 23rds joint life with level payments for ages 65 and 60) rose from about £4,000 per annum to £5,795. That is nearly £1,800 per annum gross which is a 45% increase. Twelve months ago, the benchmark gilt yield was around 1% today (26 September 2022) it is 4%.

That doesn't help for index-linked, but this was the situation in 1998 for £10,000:

.                    Single Life   Joint Lives
Level 909.00 797.86
5% escalating 646.00 448.00
Index-linked 740.00 570.76

That suggests something like £4,100 for joint lives today, but it's no doubt a moving target. Incidentally as of last night my HYP was yielding 5.4% from 37 equities.

TJH

Alaric
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Re: Buying annuities

#533645

Postby Alaric » September 30th, 2022, 11:49 am

tjh290633 wrote:I have one, but it is limited to a maximum of 5%p.a. increase. When the RPI fell, it stayed level, then resumed tracking the RPI when it rose above the previous level. Whether it will do the same with a rise above 5% remains to be seen. I live in hope that it will.



You may have to read the small print. There are two ways it could work. One is that the increase is limited to 5% when RPI increases are above that. The other is that they check whether increasing it at the full RPI would still be lower than what it would be if it had increased by 5% every year. Over time if RPI increases continued to be above 5%, the two methods of doing increases would converge and you would never see more than 5%.

tjh290633
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Re: Buying annuities

#533650

Postby tjh290633 » September 30th, 2022, 11:55 am

Alaric wrote:
tjh290633 wrote:I have one, but it is limited to a maximum of 5%p.a. increase. When the RPI fell, it stayed level, then resumed tracking the RPI when it rose above the previous level. Whether it will do the same with a rise above 5% remains to be seen. I live in hope that it will.



You may have to read the small print. There are two ways it could work. One is that the increase is limited to 5% when RPI increases are above that. The other is that they check whether increasing it at the full RPI would still be lower than what it would be if it had increased by 5% every year. Over time if RPI increases continued to be above 5%, the two methods of doing increases would converge and you would never see more than 5%.

I have just had a look at what happened in the past:

Date         RPI (Apr)   Inflation   Increase
07/07/2008 2.140 4.19% 4.19%
07/07/2009 2.115 -1.17% 0.00%
07/07/2010 2.228 5.34% 4.11%
07/07/2011 2.344 5.21% 5.00%
07/07/2012 2.425 3.46% 3.46%
07/07/2013 2.495 2.89% 2.89%
07/07/2014 2.557 2.48% 2.48%
07/07/2015 2.580 0.90% 0.90%

In 2010 it came back to where it should have been, tracking the RPI, but in 2012 I only got the actual increase, not the lost 0.21% from the previous year. This year I have lost out on 6.13% because of the 5% limit.

TJH

vand
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Re: Buying annuities

#533833

Postby vand » October 1st, 2022, 1:56 am

Not being funny, but are you serious? With a £3m pot you can easily live on £100k-120k/year - inflation adjusted - and never worry about even touching the principal.

I get that people can be cautious when talking abour retirement planning, but there is being cautious and there is being over-cautious. Better to live reasonably today with the understanding that you may need to get a paper-round if you are in the 0,1% of the distribution where you money is in reasonable danger of running out.

As it stands, you will almost certainly die with much more money than you retire with - so my energy would be focussed on how to spend it most optimally.

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Re: Buying annuities

#533849

Postby Mike4 » October 1st, 2022, 9:21 am

vand wrote:Not being funny, but are you serious? With a £3m pot you can easily live on £100k-120k/year - inflation adjusted - and never worry about even touching the principal.

I get that people can be cautious when talking abour retirement planning, but there is being cautious and there is being over-cautious. Better to live reasonably today with the understanding that you may need to get a paper-round if you are in the 0,1% of the distribution where you money is in reasonable danger of running out.

As it stands, you will almost certainly die with much more money than you retire with - so my energy would be focussed on how to spend it most optimally.


It's an interesting trait of human nature, demonstrated here in this thread. It doesn't seem to matter how much any of us has, it never seems to feel secure. I've heard billionaires express this same sense of insecurity, saying it is what drives them to keep working and wanting to make more money. Chasing an impossible-to-reach Nirvana of having 'enough for the rest of their lives'.

Not intended as a criticism of the OP, more a case of understanding how some of us think (or more accurately, feel about money) might perhaps help....

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Re: Buying annuities

#535199

Postby Dissenter » October 6th, 2022, 9:14 am

I asked the same thing of HL, but approaching 70, they quoted a return on an indexed annuity of over 4%. I don't much like paying fees to the annuity providers but increasingly like the idea of some security. I believe a lot of these things are backed up by gilt linkers, so my plan is to buy a short term Indexed Gilt etf as a substitute and look at the annuities again in a few years time. I guess from your point of view that wouldn't give you the income return you want. But if you bought the US $ equivalent (TIPS) and accepted the exchange rate risk, that would give you a higher yield.
The IShares offering is www.ishares.com/us/products/239450/isha ... s-bond-etf No doubt there are alternatives.

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Re: Buying annuities

#535204

Postby Wuffle » October 6th, 2022, 9:33 am

The absence of any mention of IHT here has surprised me.
Buying an annuity is essentially at 40% off, or advice to spend it on anything at a 40% discount to wind the principle down on purpose.
Or is it so assumed that nobody with a 'pile' hasn't already 'made allowances' that it doesn't even cross anybody's mind amongst the Fool glitterati to mention it?

The man on the street would be uncomfortable with this reality.

W.

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Re: Buying annuities

#535257

Postby Snakey » October 6th, 2022, 11:55 am

I hear ya in the sense that if it were an exam question we'd have dropped a few marks for sure. But the OP is 54 and half of a "we", and with no mention of poor health you wouldn't expect the second death for decades. Plenty of time later for IHT planning that involves irrevocably swapping capital for a fixed (and therefore potentially sub-optimal) return over an uncertain period. To trot out a couple of cliches, don't let the tail wag the dog and put on your own mask before helping others. It seems from the OP the primary concern right now is the anxiety demons, not what type/level of gamble their eventual heirs might ideally wish to take to maximise their net inheritance.

Re: your last sentence, colour me arrogant but the man on the street (my street, at least) has no idea about IHT or annuities, never mind the interaction thereof. Do you mean the IFA on the street? (Or do you mean a more generalised discomfort of the averagely-waged that anyone who has three million quid doesn't just want to rush out and immediately start to spend it on cool things and let tomorrow take care of itself? The latter is a view I expect I'd definitely find!)


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