Annuities

[DelayedInvestor]

Up until a few months ago I didn't give much thought to investing. My plan had been to contribute to my pension consisting of lowish cost passive style funds and then get an annuity when I retired. I figured my financial future was better served by me putting my effort into my career than trying to 'beat the market'.

However, one day I decided to take a look at what sort of annuity I'd be able to get if I was 65 and retiring now. The money and pension service seemed to be suggesting about 4% and then I looked at my pension statement and it was giving an illustrative figure of 2.5%.

Now, I know that interest rates are low at the moment but 2.5-4% for what is essentially a guaranteed default bond doesn't seem great. Am I being unrealistic in thinking that if I were retiring now I could do better than that by picking a combination of high yield funds and bond funds? Indeed, I would have thought that you could do better than that and expect some sort of capital growth.

Obviously, this question is predicated on the assumption that the markets return to historically recognisable patterns if/when the current situation resolves itself.

[XFool]

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[dealtn]

Am I being unrealistic in thinking that if I were retiring now I could do better than that by picking a combination of high yield funds and bond funds? Indeed, I would have thought that you could do better than that and expect some sort of capital growth.

Yes you "could". You might also be disappointed. What is your bigger concern, the "paltry" returns offered by the annuity route, or the possible "failure to deliver" the certainty of an alternative?

[Alaric]

Am I being unrealistic in thinking that if I were retiring now I could do better than that by picking a combination of high yield funds and bond funds? Indeed, I would have thought that you could do better than that and expect some sort of capital growth.

Probably, but outside the guarantee of an annuity, you will have the spectre of income and dividend cancellation hanging over you.

[DelayedInvestor]

Thanks Alaric and dealtn. Sorry, it was only after I posted this that I came across the the 4% rule question on the Retirement Investing (inc FIRE) forum. That had some interesting insights on the topic.

I guess it's all about what price you want to put on certainty.