Annuity, cash, bonds or investment for 77 year old?

[LanceSterling]

Hi there. My Mum (a risk-averse 77 year-old) is going to have around £300K in the bank following a property move. She receives the state pension but has no other form of income, so is considering the best way to use the £300K to fund her retirement. So, she could buy an annuity for guaranteed fixed-income; keep the money in the bank and live off the capital as she has modest outgoings and no mortgage; or invest the money for income in a bond or some other investment vehicle (but as mentioned, she is very risk-averse). I'd be interested to hear your thoughts on the best way to go to ensure she has a reasonable income for the rest of her life.

[xxd09]

Looks like she could get up to £15000 to £21000 pa for life from current annuity rates from £300000
That’s the best return available -capital gone of course
Hard to beat -bonds are relatively safe but low returns just now
Anything else risky
If she doesn’t want to leave the money to any one and doesn’t mind losing the capital annuity is the way to go
Watch her tax status-annuity returns counts as income
xxd09

[scrumpyjack]

Looks like she could get up to £15000 to £21000 pa for life from current annuity rates from £300000
That’s the best return available -capital gone of course
Hard to beat -bonds are relatively safe but low returns just now
Anything else risky
If she doesn’t want to leave the money to any one and doesn’t mind losing the capital annuity is the way to go
Watch her tax status-annuity returns counts as income
xxd09

It is my understanding that if you buy an annuity from non pension resources, it is not all taxed as income. Part of each annuity payment is deemed to be a return of your capital and is not taxed.

[Dod101]

Looks like she could get up to £15000 to £21000 pa for life from current annuity rates from £300000
That’s the best return available -capital gone of course
Hard to beat -bonds are relatively safe but low returns just now
Anything else risky
If she doesn’t want to leave the money to any one and doesn’t mind losing the capital annuity is the way to go
Watch her tax status-annuity returns counts as income
xxd09

It is my understanding that if you buy an annuity from non pension resources, it is not all taxed as income. Part of each annuity payment is deemed to be a return of your capital and is not taxed.

That is or at least used to be true. Note of course that as interest rates rise, so should the return on the annuity. Furthermore if she has any sort of health problem be sure to mention it on the application. If the insurer concludes that it may affect her life expectancy she may get a better deal.

Quite possibly the annuity route is best for her but of course that reduces the amount of her estate for those likely to benefit.

If that is the way she wants to go, all you then have to do is to find the best rate in the market! You would probably be best to get hold of an IFA to research that for you, but watch the commission. Also be sure to explain that it is not a pensions annuity you need. I do not know what the actual expression would be but nowadays annuities tend to be concentrated on pension lump sums. It is a one off decision so you need to try to get it right.

She has flexibility of course, and does not need to put the whole sum into the annuity. She might want to retain a sum for a rainy day because surely a 77 year old will have life expectancy of 10 years? Maybe more.

Dod

[CliffEdge]

Purchased life annuity

[Dod101]

Purchased life annuity

Thank you. I had forgotten.

Dod

[Newroad]

Hi LanceSterling.

Here is an illustrated version of my rough thoughts (and the reason why I asked again about the VHYL ETF under separate cover).

Pick a sensible and simple product, e.g. VHYL*. Guess an age your Mum might survive to - I have assumed 100. Invest in the product and take out 1/remaining years each year - from dividends first if needed, else selling units. This will give rise to something like this



The unit price cannot be guaranteed of course (I suppose, nor can the current dividend yield/distribution of around 3.1%) and hence column C is only an approximation. But it is likely to be roughly accurate** and if so, produce the slightly rising income per year. Also, it is self-adjusting in the case of market corrections. Note that Column B assumes the drawdown taken out then the dividend distribution added.

Compared to the current annuity rates quoted below (£15K to £21K) this seems like a reasonable bet - and were she to pass away at (say) 90, her estate would pass on the best part of £200K still.

Please use this as indicative only - do your own research - but it is designed to give you an idea.

Regards, Newroad

* An Exchange Traded Fund, from company Vanguard, which invests in large basket of global high yield stocks

** Indeed, in the long term, it will likely understate, as I have assumed no capital growth (or loss) - over 23 years it is likely to grow, but in the short term, both are arguably equally as likely

[Dod101]

Hi LanceSterling.

Here is an illustrated version of my rough thoughts (and the reason why I asked again about the VHYL ETF under separate cover).

Pick a sensible and simple product, e.g. VHYL*. Guess an age your Mum might survive to - I have assumed 100. Invest in the product and take out 1/remaining years each year - from dividends first if needed, else selling units. This will give rise to something like this



The unit price cannot be guaranteed of course (I suppose, nor can the current dividend yield/distribution of around 3.1%) and hence column C is only an approximation. But it is likely to be roughly accurate** and if so, produce the slightly rising income per year. Also, it is self-adjusting in the case of market corrections. Note that Column B assumes the drawdown taken out then the dividend distribution added.

Compared to the current annuity rates quoted below (£15K to £21K) this seems like a reasonable bet - and were she to pass away at (say) 90, her estate would pass on the best part of £200K still.

Please use this as indicative only - do your own research - but it is designed to give you an idea.

Regards, Newroad

* An Exchange Traded Fund, from company Vanguard, which invests in large basket of global high yield stocks

** Indeed, in the long term, it will likely understate, as I have assumed no capital growth (or loss) - over 23 years it is likely to grow, but in the short term, both are arguably equally as likely

Cannot argue with the figures but remember the sequence of returns risk.

Dod

[Newroad]

Of course, Dod.

And I believe I alluded to that above by being unable to guarantee Column C earlier.

Here's another example. It assumes

50% drop in capital prices during the first year
No recovery or improvement in capital prices - ever (or at least, in the next 22 years)
Proportionate dividend payout ratio (so, in effect, a 6.2% yield after the initial capital drop)

So, clearly not as good, but not terrible either (though I suppose that's in the eye of the beholder) - and remember, I'm assuming no capital recovery whatsoever! That is very unlikely based on history (indeed, quite the opposite) but there you go.

We could model this sort of thing to our heart's content - as I said earlier, I was just trying to be helpful and indicative.

Regards, Newroad

[dealtn]

Hi there. My Mum (a risk-averse 77 year-old) is going to have around £300K in the bank following a property move. She receives the state pension but has no other form of income, so is considering the best way to use the £300K to fund her retirement. So, she could buy an annuity for guaranteed fixed-income; keep the money in the bank and live off the capital as she has modest outgoings and no mortgage; or invest the money for income in a bond or some other investment vehicle (but as mentioned, she is very risk-averse). I'd be interested to hear your thoughts on the best way to go to ensure she has a reasonable income for the rest of her life.

What particular risks is she averse too?

Assuming bonds are without risk is a false assumption I'm afraid, which doesn't square with someone who is "very risk-averse".

[Dod101]

Of course, Dod.

And I believe I alluded to that above by being unable to guarantee Column C earlier.

Here's another example. It assumes

50% drop in capital prices during the first year
No recovery or improvement in capital prices - ever (or at least, in the next 22 years)
Proportionate dividend payout ratio (so, in effect, a 6.2% yield after the initial capital drop)

So, clearly not as good, but not terrible either (though I suppose that's in the eye of the beholder) - and remember, I'm assuming no capital recovery whatsoever! That is very unlikely based on history (indeed, quite the opposite) but there you go.

We could model this sort of thing to our heart's content - as I said earlier, I was just trying to be helpful and indicative.

Regards, Newroad

Well I think your suggestion is helpful. My comments on an annuity are simply to try to be helpful if that is the way they decide to go.

Dod

[Kantwebefriends]

"My Mum (a risk-averse 77 year-old)": is there any reason in her medical history to think she couldn't live another 20 years?

If not then I'd be leery of a large Purchased Life Annuity because they are not available with inflation-protection i.e. index-linking.

On way she could effectively buy an index-linked annuity is to suspend her state pension for two or three years. (The government prefers the verb "defer".) She'd live off her cash in the meantime and when she restarted her pension she'd have another 10.4% for each year of suspension. That extra pension is increased in line with the CPI. It's true that she would have been better off doing this years ago but maybe it's not too late to be useful. https://www.gov.uk/government/publicati ... te-pension

To work out how long to defer for you could use this calculator. http://www.johnkay.com/pension/
Or you could look at it from the point of view of income tax: how long a deferral would let her state pension fill up her personal allowance so that her state pension would still be free of income tax?

Otherwise she could keep a lot of cash - with some attempt to earn high interest to exploit her savings allowance and starting rate for savings.
She could bung £50k into Premium Bonds - their return is tax-free and averages a little under 1% p.a. at the moment. Presumably that might rise as interest rates rise in general.

You might persuade her to put enough into equities to use up her dividend allowance (£2,000 p.a): so, say £50k at a yield of 4%. To hold 17% of her assets in equities doesn't seem too daring but there's no point even attempting it if it would worry her. She could also buy some index-linked gilts - their "coupon" counts as interest so, again, could exploit her savings allowance and starting rate for savings. Other possibilities would include buying some gold sovereigns at (say) The Royal Mint - no tax to pay there and you have the the hope that they will protect against a stock-market crash. Lastly some commodities as hoped-for protection from inflation. See https://advisors.vanguard.com/iwe/pdf/ISGCTIPS.pdf

Maybe one way to broach the question of equities would be to look at those investment trusts/investment companies that hope to be wealth-preservers rather than great wealth-growers. So Ruffer Investment Company, Personal Assets Trust, Capital Gearing Trust, and conceivably "RIT Capital Partners plc, formerly Rothschild Investment Trust". It might be worth arranging that £20k of such investment be held in a 2022/23 Stocks and Shares ISA since that guarantees no trouble with tax. Or instead she could consider holding £20k of short-maturity US government index-linked bonds in an ISA - see the TIPS discussed in the Vanguard link above.

If after all that she also fancied a bit of Purchased Life Annuity, who am I to argue? Her peace of mind has got to be one of your main ambitions. Although you can't buy index-linked PLAs I think I remember that you can buy escalating ones. But you'd have to guess at what annual rate you'd like the income to escalate. This might be a less difficult task than persuading her to put her toe in the water with equities. There's a reference here to a "a stepped annuity" which is presumably the same thing.
https://www.pruadviser.co.uk/knowledge- ... e-annuity/

That link also says "UK resident insurers are obliged to deduct tax at source from the income/interest element." I wonder if that implies some hassle in claiming back tax with an annual self-assessment tax return?

[Dod101]

To answer Kantweberfriend's final comment, I think tax will be deducted at source from the interest element of the annuity but that HMRC will probably issue a tax code so that the tax deducted will be more or less correct, especially if her affairs are relatively straightforward.

Incidentally, I think that suspending the State pension for a 77 year old is a non starter, especially for a risk averse one! I am about the same age, and I would not do that.

Dod

[TahiPanasDua]

Apologies for being a bit off topic so please feel free to move this to another thread.

It is always assumed that an annuity is one of the safest possible investments you can make. That may be true. However, is there any protection if your, say, insurance company providing the annuity goes bust? If not, would it be safer to buy an income-style ETF invested in 2/3,000 companies? VHYL, for example, pays 3.1% and holds about 1,800 companies, albeit the amount of income is not fixed. Of course the ETF provider could go bust.

Please excuse my ignorance. Maybe there are provisions, for example, to lodge gilts owned by the annuity provider with an independent holding company putting it on a similar footing to the ETF. That would be some compensation for an old body dependent on the annuity but, in reality, a massive worry.

TP2

[Wuffle]

I have PoA over my mother's cash pile from a recent house sale and have to cover her care costs (less the state pension).
By coincidence her worth is an order of magnitude greater than my investments in my ISA.
As I suffer, it shows up her position for what it is. Not disastrous.
At least for the time being.

W.

[Dod101]

I have PoA over my mother's cash pile from a recent house sale and have to cover her care costs (less the state pension).
By coincidence her worth is an order of magnitude greater than my investments in my ISA.
As I suffer, it shows up her position for what it is. Not disastrous.
At least for the time being.

W.

You have raised a point which I do not think has been touched on in answering the original query. Any 77 year old is surely going to be thinking of the possibility at least of needing paid for care in later life. With £300,000 in realisable cash, the mother or her family will have at least a choice of care home for at least a few years I expect. Otherwise it will be down to the local authority to fund the costs, and any choice is largely removed from the family, or at least they are going to be restricted by the amount that the L A is prepared to pay. That may not matter to any of them but should surely be at least thought about.

Dod

[tjh290633]

To answer Kantweberfriend's final comment, I think tax will be deducted at source from the interest element of the annuity but that HMRC will probably issue a tax code so that the tax deducted will be more or less correct, especially if her affairs are relatively straightforward.

It depends on which source of income counts first. State pension is always paid tax free, so the amount to be paid is deducted from the personal allowance for the first ranked. After that sources get tax codes according to the predicted tax liable, like "BR" if it will be 100% charged at basic rate. Quite how a purchased life annuity would fare I suppose relies on the annuity provider separating interest and capital repayment,

TJH

[scrumpyjack]

"My Mum (a risk-averse 77 year-old)": is there any reason in her medical history to think she couldn't live another 20 years?

If not then I'd be leery of a large Purchased Life Annuity because they are not available with inflation-protection i.e. index-linking.

On way she could effectively buy an index-linked annuity is to suspend her state pension for two or three years. (The government prefers the verb "defer".) She'd live off her cash in the meantime and when she restarted her pension she'd have another 10.4% for each year of suspension. That extra pension is increased in line with the CPI. It's true that she would have been better off doing this years ago but maybe it's not too late to be useful. https://www.gov.uk/government/publicati ... te-pension

They reduced the rate of increase for deferral and it is now 5.8%, not 10.4%. I did that myself for 5 years when it was 10.4% - worth doing then but I'm not so sure now

[hiriskpaul]

It is all very well being risk-averse, but holding cash is very likely to run the risk of having the spending power depleted by inflation. Is she aware of and averse to that risk?

The fact is to have any chance of maintaining spending power you have to take risks, unless you are lucky enough to live through a period when cash deposits produce a positive real return. I would suggest that this is not looking likely for the next few years at least.

She could invest say 75% in a ladder of cash deposits and the rest in equities, such as a cheap global tracker, but if she did that she would see periods when the investment fell in value. If that is likely to cause acute anxiety, you might find ways of mitigating that feeling of AA. One way is to tell her not to look at the value of the investment. Set it up so that income gets paid to her current account so at least she feels she is getting a return. I have done this for my sister-in-law, who is risk-averse and likely to act rashly given half a chance. The rest of her money is in cash and she is buying NHS Additional Pension income. So index linked annuity income, but much better value for money than DC pension annuities or PLAs.

If that "don't look" approach is unlikely to work, you can mitigate the volatility by investing in something that will dampen it down, but you are never going to eliminate it completely. For example, one of the Vanguard LifeStrategy funds that has a high proportion of lower duration GBP hedged bonds might do the trick. Anything like that though has its drawbacks, eg bond returns may end up being lower than cash deposits and will also at times be negative in nominal terms.

ps, don't suspend her State Pension! The numbers might just about work out ok at the start of retirement but make no sense for a 77 year old. Even a PLA would likely work out better.

[ursaminortaur]

"My Mum (a risk-averse 77 year-old)": is there any reason in her medical history to think she couldn't live another 20 years?

If not then I'd be leery of a large Purchased Life Annuity because they are not available with inflation-protection i.e. index-linking.

On way she could effectively buy an index-linked annuity is to suspend her state pension for two or three years. (The government prefers the verb "defer".) She'd live off her cash in the meantime and when she restarted her pension she'd have another 10.4% for each year of suspension. That extra pension is increased in line with the CPI. It's true that she would have been better off doing this years ago but maybe it's not too late to be useful. https://www.gov.uk/government/publicati ... te-pension

They reduced the rate of increase for deferral and it is now 5.8%, not 10.4%. I did that myself for 5 years when it was 10.4% - worth doing then but I'm not so sure now

Since she is 77 she reached state pension age before 6th April 2016 and hence the rate of increase for her would still be 10.4%.

https://www.gov.uk/deferring-state-pension/what-you-get

If you reach State Pension age on or after 6 April 2016

Your State Pension will increase every week you defer, as long as you defer for at least 9 weeks.

Your State Pension increases by the equivalent of 1% for every 9 weeks you defer. This works out as just under 5.8% for every 52 weeks.
.
.
.
If you reached State Pension age before 6 April 2016

You can usually take your extra State Pension as either:

higher weekly payments
a one-off lump sum

When you claim your deferred State Pension, you’ll get a letter asking how you want to take your extra pension. You’ll have 3 months from receiving that letter to decide.
Higher weekly payments

Your State Pension will increase every week you defer, as long as you defer for at least 5 weeks.

Your State Pension increases by the equivalent of 1% for every 5 weeks you defer. This works out as 10.4% for every 52 weeks.

Whether deferring her pension at that late age even with that higher uplift is worth it is a different question.