Risking an annuity?

[scrumpyjack]

Who was in the better position when the Equitable went bust?

Those who took out fixed annuities (fixed as in not subject to Equitable's financial performance) continued to receive their payments as normal. Eventually a deal was done to transfer them to Canada Life as I think it was.

Equitable didn't slightly speaking go bust, but it did have to drastically scale back all the unwise promises it had made based on supposed future investment profits,

Well effectively it did go bust as it had to welch on the amounts policyholders were contractually entitled to (guaranteed annuity rates). It got £1.4 billion of taxpayers money because the regulators had been asleep at the wheel for decades (only a fraction of the loss). Policyholders were blackmailed into accepting a scheme of arrangement because the alternative would have been worse.

Anything to do with pensions is high on the priority list for rescue and there will always be the argument that if an insurance company cannot meet its liabilities it is at least in part the fault of the regulators.

[Lootman]

For me the issue is very simple. Buying an annuity is betting the annuity provider that you will live a long time. But you could die the next day and then all that money is gone, and not available to your heirs.

Even if I were very risk-averse (I am not) I would still rather stick my money in gilts or US treasuries, get 5% a year, and keep my capital.

That said, if my major priority were to reduce IHT on my estate, then this is one way of doing it. You can presumably then make regular gifts from the annuity income to further lower the value of your taxable estate.

[Steveam]

If the Global Economy gets to the stage when Annuity providers go bust, I can't see those self managing being in a better position.

Who was in the better position when the Equitable went bust? Not people like me, who paid no attention to pensions (or other financial products more sophisticated than a savings account), but invested with the Equitable to get the SERPS discount on my tax rate.

Agreed, many other assets will be in trouble, and with them yours and my portfolios - among many others. But mine will be more diversified than an annuity is allowed to be. And - probably much more importantly, I'll still be in charge. Psychologically I think it's better to be in the driving seat and in charge when you have a scarily-near miss than helpless in the passenger seat!

I’d want the most competent driver in the driving seat. I certainly don’t consider that to be me - there are two reasons I invest directly and/or manage my own investments i) cost for what seems to generally be pretty mediocre performance and ii) trust. If I could find an agent who I believed would outperform and that I could trust then I’d be interested.

As for the details of whether or not to buy an annuity of some sort - not for me as I have a seriously reduced life expectancy and although I could get an impaired life annuity I’m really not convinced by the numbers. I’d be more interested in getting the odds on me living to 90 and betting £50k at decent odds - then I could spend everything targeted to 90.

Best wishes,

Steve

[AshleyW]

A single life RPI annuity is paying out more than you could safely take in drawdown so could be a very good option for some, and a level annuity could be even better if you believe spending in retirement declines with age and that inflation will follow historic averages.

I saw a comment earlier about a gilt ladder beating an annuity - but surely that calculation must assume a specific longevity and one of the characteristics of an annuity is it is insurance against living too long.

[Wuffle]

Is there merit in suggesting that an annuity is really insurance against retiring too soon?
You are going to die when you are going to die, but the retirement decision is your own and really what is going on here is a balance of the two with an eye on risk management.
Working longer and annuity purchase will both improve your chances of financing a long life (whether this does or indeed should prompt a frank conversation with heirs is another matter).
Fortunately, as I said earlier, you are probably a couple of hundred grand invested in an IL annuity already.

W.

[vand]

Definitely worth considering an annuity these days. They are probably (still) not the optimal solution and on balance the annuity provider will end up better off, but often on these pages I see someone with a sizeable nestegg from which they have very modest requirements while also valuing simplicity, and if that is the case then an annuity may well be a good fit.

there are also products on out there whoch are rarely mentioned like fixed term annuities which will pay you out for a set number of years and then hand you back a gauranteed pot. might be worth it if have to manage a dc pot while waiting for db streams to come online.

[frugal90]

My wife just bought a five year annuity from Canada life. Handed over £93750 and getting back just over £107000 over five years. She has a reasonable equity portfolio and teachers pension coming in five years. Was bought to replace monthly income.

[mc2fool]

My wife just bought a five year annuity from Canada life. Handed over £93750 and getting back just over £107000 over five years. She has a reasonable equity portfolio and teachers pension coming in five years. Was bought to replace monthly income.

So that's £93,750 paid now and £21,400 (£107K/5) paid out to her over the next year and in each of the following four years? Paid monthly?

What's the tax situation on that?

[NotSure]

My wife just bought a five year annuity from Canada life. Handed over £93750 and getting back just over £107000 over five years. She has a reasonable equity portfolio and teachers pension coming in five years. Was bought to replace monthly income.

So that's £93,750 paid now and £21,400 (£107K/5) paid out to her over the next year and in each of the following four years? Paid monthly?

What's the tax situation on that?

In gross terms, seems close to what you could achieve with a "ladder" of fixed term saving accounts (maturing every 6 or 12 months) plus a good easy access account to cover the gaps. Back of an envelope, I think the fixed term route may just edge it gross, but not much in it.
eg: https://oaknorth.co.uk/personal-savings/fixed-term/#how-long-can-you-lock-your-savings-away?

Not much tax would be paid using fixed term accounts, assuming it was the the only income.

DAK, do fixed term annuities annuities have any tax advantages, as compared to standard fixed term savings accounts? If paid monthly into current account, certainly convenient.

[xxd09]

frugal90
I know the deed is done but……
If you just spent this capital sum down over 5 years -paying yourself £20000 pa there would be no tax to pay
Sheltering some of the capital in easy access cash ISAs gives some growth -again no tax to pay-allowed to shelter £20000 pa
A high interest bank/bs account allows you to generate £1000 pa interest tax free £25000 @4%=£1000 of interest for a basic rate tax payer
Just my thoughts
xx09

[frugal90]

Already maxed out on savings account. Lump sum will be invested in an IT yielding about 5% bringing in another £1500 per year tax free.

[Dod101]

My wife just bought a five year annuity from Canada life. Handed over £93750 and getting back just over £107000 over five years. She has a reasonable equity portfolio and teachers pension coming in five years. Was bought to replace monthly income.

So that's £93,750 paid now and £21,400 (£107K/5) paid out to her over the next year and in each of the following four years? Paid monthly?

What's the tax situation on that?

Obviously the return of capital element is tax free and since it is over a short period there will not be much tax to pay. The great advantage is of course simplicity and nothing to do. The funds will just arrive. I might have been inclined not to do it as I like being in control but I can see the benefits of this arrangement.

Dod

[mc2fool]

So that's £93,750 paid now and £21,400 (£107K/5) paid out to her over the next year and in each of the following four years? Paid monthly?

What's the tax situation on that?

Obviously the return of capital element is tax free ...

I'd hope so, but is the rest spread equally (tax liability wise) over each year, or does it pile up at the end? And is it interest, and so qualifies for the savings allowance, or income, or something else? Any other tax wrinkles?

[tjh290633]

My wife just bought a five year annuity from Canada life. Handed over £93750 and getting back just over £107000 over five years. She has a reasonable equity portfolio and teachers pension coming in five years. Was bought to replace monthly income.

So that's £93,750 paid now and £21,400 (£107K/5) paid out to her over the next year and in each of the following four years? Paid monthly?

What's the tax situation on that?

Isn't much of each payment a return of capital? That's how annuities used to be taxed before the rules changed. I have a feeling that it still applies if the annuity is not bought with pension money.

TJH

[Dod101]

Obviously the return of capital element is tax free ...

I'd hope so, but is the rest spread equally (tax liability wise) over each year, or does it pile up at the end? And is it interest, and so qualifies for the savings allowance, or income, or something else? Any other tax wrinkles?

I think each payment is divided between capital return (untaxed) and interest (taxed) so that you pay tax as you go. Whether the taxable element is allowed against the interest allowance I do not know. I use the expression 'interest' loosely. Presumably the OP or his wife anyway, can clarify that.

It used to be simply a charge as income but that was before the time of these silly additional allowances.

Dod

[Dod101]

So that's £93,750 paid now and £21,400 (£107K/5) paid out to her over the next year and in each of the following four years? Paid monthly?

What's the tax situation on that?

Isn't much of each payment a return of capital? That's how annuities used to be taxed before the rules changed. I have a feeling that it still applies if the annuity is not bought with pension money.

TJH

As I said.

Dod

[frugal90]

We are happy with the arrangement.

We were going to front run the teachers pension using drawdown, but improvement in interest rates made this a simple option.

Plenty emergency cash, teachers pension lump sum to come in full at 60. The SIPP was meant to equal what my wife's income was to be at 60 and it is just about bang on.

We won't take income from the tax free lump in year 1 and two but might in year 3 to 5 to provide some built in inflation proofing.

ISA portfolio for wife will now yield about another £12k tax free.

Happy days so far!

[Dod101]

We are happy with the arrangement.

We were going to front run the teachers pension using drawdown, but improvement in interest rates made this a simple option.

Plenty emergency cash, teachers pension lump sum to come in full at 60. The SIPP was meant to equal what my wife's income was to be at 60 and it is just about bang on.

We won't take income from the tax free lump in year 1 and two but might in year 3 to 5 to provide some built in inflation proofing.

ISA portfolio for wife will now yield about another £12k tax free.

Happy days so far!

Personally I think that annuities are under rated because once you have got them set up there is nothing more to do. They just run on irrespective of the condition of the marketplace as regards interest rates and so on. Everyone can always find a 'better' solution but sometimes the KISS principle is the most sensible. Sounds as if you are well set up.

Dod

[mc2fool]

We are happy with the arrangement.

Good, but I for one would appreciate it you could answer:

My wife just bought a five year annuity from Canada life. Handed over £93750 and getting back just over £107000 over five years. She has a reasonable equity portfolio and teachers pension coming in five years. Was bought to replace monthly income.

So that's £93,750 paid now and £21,400 (£107K/5) paid out to her over the next year and in each of the following four years? Paid monthly?

What's the tax situation on that?

So that the rest of us are clear on what the arrangement is. TIA.

[frugal90]

She'll have her annual allowance then pay tax on the extra. Because the annuity has only started, very little tax this year.

We have been I vesting in ISAs for years, love the fact that our income from that is tax free.

We actually don't really need it unless we are doing a special holiday/ big spend so mostly just let the divis re-invest, especially when stocks are well off their highs.

When they are near their highs, I often hold as cash then re-balance when there looks to be a good opportunity.

Seems to have worked well so far!