Annuity or not?

[Rituximan]

I would like to retire but am in a bit of a quandary as to how to use a defined contribution personal pension: buy an annuity or put it into drawdown?
At the start of 2020 I wanted to retire, but my employers asked if I would consider working three days a week. I decided to try that for a few months but then the pandemic happened and I am still at it although not enjoying the experience of working from home, which has come to feel like three days of house arrest per week. My intention had been to take the defined contribution pension that my employer and I pay into and put that into a SIPP and use drawdown. In 2019 I had also inherited some money and at the start of 2020 I put £190k into a basket of investment trusts with the intention of using the dividends to support my retirement. This basket lost some value during the COVID downturn but has pretty much recovered and the dividends have kept coming - I cannot remember exactly how much I had been hoping to get from this but I don't think it's much below what I was hoping for and looks to be yielding about £8k p.a. and I am reasonably happy with it. In contrast, my stocks and shares ISA, which is mainly invested in UK equities, is still around 15% down from about £400k one year ago and has yielded just nearly £11k in dividends this year whereas I think I got about £16k from it last year So, having seen what events can do to one’s investments the secure income offered by an annuity seemed like a good idea earlier in the year. The thing I am in a quandary about is that I was diagnosed with lymphoma in 2011. I needed treatment in 2016 and then towards the end of the first lockdown I discovered that it had returned and I started treatment again in August which should hopefully finish in January. What is bugging me is whether an annuity is likely to be good value for someone in my position? The income will be secure, but I am not sure how likely I will be to get my money back, even at the enhanced rates that I have been quoted after providing my medical history. Back in 2011, I was told that lymphoma is slow growing, can be treated but not cured and I could hope to live for at least another twenty years – and I am nearly halfway through that now. I tried to have a conversation about my prognosis and expectations with my current haematologist, but he is only on a temporary contract and wants to wait for test results to see how effective the current treatment has been, which will probably be sometime in February.
Despite the effects of the downturn on my investments and my initial thoughts about annuities I am having doubts about that approach now and am coming back round to feel that the original plan to put my defined contribution pension into a SIPP and use drawdown might still be the best option. I also have a small frozen final salary scheme which is due to pay out when I reach the age of 65, in 2026. If I accessed that now, it would pay out around £8,000 p.a. but I can see from valuations that over the last two years, the amount it would pay has increased by around 10% p.a. So, I am inclined to hang on to that for now. I have no mortgage, no debt, no dependents and my partner is financially secure in her own right. There is no tearing hurry, but I would like to make a start. My defined contribution personal pension has recovered better than my other investments and is currently worth about £380k, which is more than it was worth at this time last year.
During the summer there appeared to be very little enthusiasm or planning for us to go back to the office; most of my colleagues seem to enjoy working from home but it has sucked all the enjoyment out of work for me. I will turn 60 in the new year and so it feels like a good time to press the button. I have been going round in mental circles over this for a while now and I think it’s about time that I actually did something. For one thing, I have to give three months' notice and if I don't make a start soon I'll still be doing three days a week when Spring arrives.

[James]

Apologies in advance as this is going to come across as harsh, but...
You've got what, £600k in the can, plus £8k a year in a defined benefit and in a few years another £8k in state pension?
No dependents or other commitments, and without wishing to be morbid, you're half way through a 20-year diagnosis, so have 10 years to go.
In your position, I'd be giving a lot more attention to spending down what I had than worrying about an annuity.
You could spend down at 60K a year, and still have the backstop of the state pension and DB pension in the fortunate event that the diagnosis is wrong. And there will be some growth and accrued earnings during that time as well,

[Lootman]

Apologies in advance as this is going to come across as harsh, but...

You've got what, £600k in the can, plus £8k a year in a defined benefit and in a few years another £8k in state pension?

No dependents or other commitments, and without wishing to be morbid, you're half way through a 20-year diagnosis, so have 10 years to go.
In your position, I'd be giving a lot more attention to spending down what I had than worrying about an annuity.

You could spend down at 60K a year, and still have the backstop of the state pension and DB pension in the fortunate event that the diagnosis is wrong. And there will be some growth and accrued earnings during that time as well,

All that, plus if the OP has anyone he would like to leave money to then an annuity wipes that out on day one. In fact I think an annuity is the devil's work, eradicating your net worth and giving you no chance of investing it better than your insurance company can, which isn't saying much.

I see a lot of energy on this site expended on worry about the tail risk of living to be 100 and running out of money. When in reality it is far more likely that you will die well before then even without any pre-existing health conditions.

So I would second the drawdown plus spend strategy. And everything above the IHT nil rate band is for sale at a 40% discount.

[JohnW]

I commiserate with your having lymphoma, and the annuity puzzle. We’re talking about lifetime annuities, right?
Firstly, are your choices as black and white as presented? Might you spend some money on an annuity and some of it into a drawdown fund(s)? Might you do this not now, but in a year’s time without much detriment, after further reflection and with new knowledge? Does the annuity rate change on your birthday, in which case you’d buy the annuity as close to on or just after your birthday.
Secondly, as one option is no annuity at all, are you au fait with appropriate strategies for optimising the way you operate a SIPP in drawdown? You should be, as it could help you decide between your two options, and it is almost obligatory if you’re to choose the SIPP/drawdown option, by giving you the best peace of mind and confidence with your strategy. There’s an extensive popular literature on drawdown approaches for retirement spending, and it’s way more helpful that just thinking in terms how much in dividends are paid to you.
Thirdly, I reject the notion that an annuity is the devil’s work. You could buy one from a company that goes bankrupt, or is in a cartel that depresses yields, or provides no inflation protection, or puts shareholder interests far ahead of customers’, has bloated administration costs and obliges you to take a reversionary annuity which your partner doesn’t need, and that would be the devil’s work. But lifetime annuities have the unique benefits of never running out, and mortality credits - the enhanced returns for all purchasers that comes because some people die early and never get their money back. Not all give credit for medical history, so that’s a benefit to you, and without people depending on your estate your decision is somewhat easier. With the certainty of income from an annuity you can allow your investment portfolio to be (a bit) more risky and stock heavy for hopefully (somewhat) better returns.
Fourthly, the only quantitative measure I can think of to guide the decision is how much you think you need to take from your SIPP/drawdown fund each year. If it’s more than 7%, that’s a lot and some annuitisation could help; if it’s less than 4% you likely don’t need to bother with that assured income stream. Those percentages are based on the ‘4% rule’ for withdrawals; look it up if needed so you can interpret the other percentage figures.
Fifthly, to annuitise or not is usually a difficult decision because there’s no going back and your lifespan is unknown. It seems harder now because interest rates are so low, and long term rates determine annuity rates. Good luck.

[Darka]

You already have enough, and with an ongoing health concern unless you really love your job - what are you doing to yourself, retire already.

And the annuity is a mistake as others have said.

[Chrysalis]

You can get a free pension wise appointment to explain the options for your DC pot. https://www.pensionwise.gov.uk/en
Annuities suit some people, as they give certainty. Lifetime annuities also have 100% government protection in the event of the company going bust. They are not popular here because most lemon fools are interested in investing, and happy to take investment risk in exchange for greater flexibility and potentially higher returns.
In your position you should get quotes for an impaired life annuity which takes into account your medical history, from several companies. There is no harm in getting an accurate quote before you make a decision. This tool is useful as a starting point (it’s not a marketing tool, it’s an impartial government site and doesn’t collect your data), but you’d need individual quotes with medical evidence to get the best idea of how much you might get: https://www.moneyadviceservice.org.uk/e ... /annuities

You need a clear idea about your essential expenses, and also an understanding of how important it is to you to have the certainty of secured income, and how much secured income you want (vs more flexible funds. As others have said you can do a mixture). I would consider drawing the DB straight away as the reductions are usually ‘fair’ for someone with average life expectancy.
I think the bigger issue is what you are going to do with the rest of your time?

[TUK020]

Apologies in advance as this is going to come across as harsh, but...
You've got what, £600k in the can, plus £8k a year in a defined benefit and in a few years another £8k in state pension?
No dependents or other commitments, and without wishing to be morbid, you're half way through a 20-year diagnosis, so have 10 years to go.
In your position, I'd be giving a lot more attention to spending down what I had than worrying about an annuity.
You could spend down at 60K a year, and still have the backstop of the state pension and DB pension in the fortunate event that the diagnosis is wrong. And there will be some growth and accrued earnings during that time as well,

I would suggest max drawdown commensurate with staying in the basic rate tax band, and then scaling back the drawdown as the DB and State Pension come on stream. Anything you don't spend, you could stuff into an ISA (or your spouse's SIPP).
The above approach will last in excess of 20 years. See if you can get a better rate from an annuity. If not, don't go there.

Spend more time thinking about what you want to do with your time. If you are not enjoying your work, then stop that. You may want to do something else for work - money is no longer the primary driver. What else do you want to achieve & contribute?

[tjh290633]

I don't see how anybody at the moment can seriously contemplate an annuity, whether normal, joint lives or on an impaired life. Go down the SIPP route, it cannot be any worse than an annuity. You already have good experience with ITs. The absence of a fall in dividends is because they have reserves which can be used for that purpose. Equities will recover in most cases, although a few basket cases need to be avoided, like airlines.

TJH

[monabri]

Definitely not the annuity based on what you say about your medical condition alone.

[OLTB]

I agree that an annuity is probably not the right way to go, but it's important to note that annuities do come now with a 'value protection' element. This means that if you bought an annuity with say £100k and received £20k in income during your lifetime and then died, £80k would be paid out to your estate.

This option does affect your maximum income (as it's an insurance), but it is available.

As you said your partner is financially dependent, this may not be required, but I thought it should be pointed out.

In your shoes I would stick with the SIPP and keep control.

Cheers, OLTB.

[JohnB]

The O/P needs to consider why they feel working from home is like house arrest. If they value the buzz of a workplace, they should make sure they have a replacement lined up if they do retire.

[sunnyjoe]

I have to give three months' notice and if I don't make a start soon I'll still be doing three days a week when Spring arrives.

What could they do if you say "I quit" and just stop working at the time of your choice? Come round and chain you to your computer? Give you a bad appraisal/reference?

Time is too precious and no matter how valued you are, you are replaceable in your employers' eyes.

[torata]

Hello Rituximan

I'd like to make two points.
On the stricter cost/benefit financial aspect as you've presented it here, another reason to go for drawdown is that if you need to have palliative care in later years, it may be better to have the flexibility of a lump sum to call upon.

The second is a wider point - and apologies if you think it's completely off topic.
As people have pointed out, financially you are pretty well sorted, even if you did go down the annuity route. However, you're vacillating though over this and also whether you should continue in your work, both of which on the surface probably seem like 'no brainers' to people on this board. Maybe you already have this covered, and I appreciate that you're currently waiting on the results of tests, but I wonder if talking to someone on a professional basis will help you as you start to have to make more decisions.

torata