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Jun 2021
12:12pm, 2 Jun 2021
1,885 posts
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bja61
Some people like an annuity because it gives them absolute certainty that it will continue to pay until they die, and historically they proved very valuable for many people. However, as they are priced off long term interest rates they currently offer quite poor returns for most people (V'rap's statement notwithstanding). Some IFAs like to propose a mix of annuity and drawdown, eg enough annuity to make sure all your bills are covered, drawdown for your discretionary spending. Provided you buy and annuity that increases in line with inflation that approach makes sense for people that are nervous.
In general people have a very poor idea of life expectancy, and an annuity means the insurance company is taking that "longevity risk" for you. If you're the lucky one who lives to 110 it will have been a great investment, if you die quickly it won't (although most have options of a 5 or 10 year guarantee period, or a spouse benefit of some sort).
One of the biggest issues with drawdown is that as people get older they become more worried about running out of money (or the impact of a stockmarket crash with no time to recover) and consequently drawdown far too little, leaving themselves a very poor quality of life. People can also come under a lot of pressure (self imposed or otherwise) to spend as little as possible so as to maximise the amount that can be passed on to the next generation. An astonishing number of people in drawdown take out less than they would have got from an annuity because they are too cautious, remarkably few have bought the infamous Maserati!
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Jun 2021
12:14pm, 2 Jun 2021
1,886 posts
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bja61
Greppers - if you have an "impaired life" ie a condition that means your life expectancy is less than average, you can get a much better annuity rate (provided you search for it). Similarly smokers and heavy drinkers get better rates as they will die sooner. A cynic might take up the fags a year before they retire and then sensibly quit the next day...
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Jun 2021
12:16pm, 2 Jun 2021
1,887 posts
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bja61
Sorry, I used to price annuities for a living, this is my specialist subject. I'll get back in my box now.
And no, I haven't bought an annuity, pure drawdown for me...
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Jun 2021
12:19pm, 2 Jun 2021
4,783 posts
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um
Many (some?) of us may have an annuity in disguise, ie a final salary scheme. Just (hopefully) that the payment from that is significantly better than withdrawing the cash and taking an annuity. But the benefits (joint life), 'sort of' inflation links etc may also be more than many annuities.
But it does provide the same 'guaranteed' income while other savings may vary & (for me) sits alongside draw down option.
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Jun 2021
12:19pm, 2 Jun 2021
74,741 posts
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Hanneke
Thanks Bja!
I have the breast cancer gene, would that give me a good rate?
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Jun 2021
12:25pm, 2 Jun 2021
1,892 posts
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bja61
H - it is worth asking an IFA to check with the specialist providers for you. Depending on the variant I think the answer is likely to be yes. (I think you may have mentioned previously when talking about screening that the NHS has quoted you a Life Expectancy of less than 5 years, in which case it is likely to be yes.)
You may well also have options to take the full amount as cash if the amounts are quite small (in pension terms) which I think you have also mentioned previously.
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Jun 2021
12:27pm, 2 Jun 2021
60,268 posts
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Diogenes
This is all very helpful
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Jun 2021
12:40pm, 2 Jun 2021
1,893 posts
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bja61
um - yep, a final salary scheme does exactly that, it provides you with an annuity often with generous inflation linking and spouse benefits. I suggest getting a transfer quote during the year prior to retirement, the capital amount ("Cash Equivalent Transfer Value") might be worth far more to you if you transfer it into a SIPP for drawdown. (I had intended to leave one of my old FS schemes as annuity, but then found that due to an historic quirk the actuarial basis for the valuation was astonishingly kind to 59 year olds so moved it over quick. The scheme have since fixed it!)
If you have a mix of FS and drawdown you need to consider whether you need to take Tax Free Cash from the FS scheme. For many people it is better value not to, and to take all the TFC from the drawdown pot instead. Get proper advice that is appropriate to you circumstances is my mantra on all this stuff. I'm an Accountant who has working in Financial Services for 30 years. Much as I thought I understood all this stuff, I paid thousands for advice and it has been worth every penny.
(Warning: anyone who is not in a very conventional M/F married relationship needs to check very carefully that the final salary scheme's definition of "spouse" meets your life style. Many impose maximum age differences [to guard against 20 year olds marrying an old person on their deathbed to get the annuity, but often applied more harshly], others still don't recognise some same sex relationships because they can legally continue to apply the rules that were in place when you joined the scheme. You don't want this to come as a surprise to a significant other who was expecting to relying on a portion of your pension if they outlive you.)
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Jun 2021
12:41pm, 2 Jun 2021
127,103 posts
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GregP
Thanks BJA - may PM you later if I may?
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Jun 2021
12:42pm, 2 Jun 2021
35,722 posts
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Hills of Death (HOD)
Yes my final salary does exactly that for example if I retired now I’d get 80k tax free plus 15k AVC and 16k a year.
I’m waiting till 60 😉
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Menopause and running
Jan 2025