Fixed Term Annuities

[elkay]

Note I will be creating a separate topic regarding my current use of financial planners, which I am considering discontinuing, so no need to discuss on this thread.

Two thirds of my pension is a DB pension in payment, which is sufficient for me live comfortably on, but not extravagantly. The other third was transferred out of DB and is sitting in a pension pot in drawdown - put into drawdown to access the tax free lump sum to assist in purchase of a house (downsizing but upgrading...). No taxable withdrawals have been made to date. The intention of having the non-DB element, was to have a pension pot available to pass on to my children, as they are unlikely to be as well placed when it comes to retirement. Though it would be available to me if the need arose.

I am approaching 62, so not eligible for the state pension for another 5 years - at that time, my DB pension + the state pension would allow me to live more extravagantly, i.e. re cars, holidays, technology. I am drawing the DB pension, which puts me in the tax-payer bracket.

At my last review, the planner suggested an option, probably to demonstrate that he was trying to earn his fees, but with no strong advice. His option was to split the fund - half to a fixed term annuity to take me to state pension age, and half to remain in the pension pot. I dismissed the option at the time, treating it as a distraction.

However, I can't get my mind away from the current annuity rates, which are very favourable from what I can gather. But would they work in my favour?

So my question is what are the pros and cons for a FTA compared to just making drawdowns from the existing pot?

Possibly a factor - I have some health conditions which would make the rates slightly more favourable for me, but I would consider myself healthier than I appear in my medical records.

As a starter...
+ the income from the annuity would be guaranteed
- but on the other hand, I can fix the drawdown amounts to be the same, and my pot may either improve or decline as the markets dictate
+ protection against a market crash
- but maybe not too concerned about missing out on potential significant growth.

Then again...
- If I took an lifetime annuity, and fed it into ISAs every year, on death would these ISAs be available tax-free to my children? (as opposed to getting a taxable pension from the pot), The income in my ISAs would be available for extravagancies...
- But presumably at risk if care home costs become a factor.

Sorry, I started asking about fixed term annuities, but now my mind is creeping back to lifetime annuities!

Not looking for advice as such, more the factors that I need to be considering.

TIA
elkay

[elkay]

On a whim, I submitted my message to Gemini, and am genuinely impressed by the response, If you're interested..
https://g.co/gemini/share/23f9ecc0a416

Of course, if you have any additional thoughts to add, I would be keen to hear them...

elkay

[Alaric]

Of course, if you have any additional thoughts to add, I would be keen to hear them...

The other thing to look at is to buy a Gilt or other fixed interest in the SIPP that matures at about the same time the State Pension kicks in. If relevant, that would preserve most or all of the capital. That's at the cost of a lower income compared to a fixed term annuity.

[ukmtk]

Do you have dependants?
I am the same age as you and have a wife.
I intend to use my SIPP to 5-6% in dividend income as drawdown (instead of an annuity) in a year or two.
This means that if I die my wife will still get the same income.
I also realised that you can take 25% of the SIPP and put it into an ISA to generate tax free income.
It is easier if you have a wife then you can put in £40K in one year (or £80K if you do it close to a tax year boundary).

[Steveam]

The AI response is very impressive. It’s generalised but that’s to be expected.

You, and others, have mentioned the risks of a market crash. There is a very specific risk when you’re starting out: sequence of return. If the market crashes, say, 40% early on it’s a disaster. If that happens near the end you’ve hopefully banked the return.

As the AI suggests simulation tools can be very helpful here but they are still only multiple simulations and you are a specific case.

Good luck and best wishes,

Steve

[Gersemi]

I think that as the previous answers say, it is really a personal decision.

However I was struck by your original post, in which you suggested that you would be able to live more extravagantly when you start drawing your state pension. I think you should give serious consideration to drawing a greater income now - whatever means you use to do it - as you cannot guarantee that you and your wife will be in a postion to enjoy the greater income later on. This figures greatly in my mind as I am 58 and retired, specifically to make sure that I enjoy life now, rather than postponing retirement to have a greater income later on - even though I hope that I will be enjoying it for many years yet.

[xxd09]

Ancient retiree (78- rtd 20+ years)
An annuity has a place but……
An investment portfolio will do as well if properly managed (probably better)and capital is maintained
Annuities have a place later on in a retirees life to ensure income lasts for ever especially as one ages and managing money is more difficult
I wouldn’t use an annuity unless you felt your income was under threat ie not enough etc
Have a simple portfolio of a global equity index tracker and a global bond index tracker fund hedged to the pound in a 60/40 asset allocation-fund units can then be sold if required at a later date-very flexible cheap and easy to manage and understand
This portfolio or part of it could always be annuitised at a later time if required when annuity rates will be better due to your age
xxd09

[SebsCat]

Then again...
- If I took an lifetime annuity, and fed it into ISAs every year, on death would these ISAs be available tax-free to my children? (as opposed to getting a taxable pension from the pot),

ISAs will be included in the value of your estate so potentially will attract inheritance tax. ISAs can, in effect, be transferred to a surviving spouse (strictly speaking your spouse gets an additional ISA allowance equal to the value of your ISAs) but otherwise there are no tax advantages on death.

[elkay]

The other thing to look at is to buy a Gilt or other fixed interest in the SIPP that matures at about the same time the State Pension kicks in. If relevant, that would preserve most or all of the capital. That's at the cost of a lower income compared to a fixed term annuity.

I've ruled out gilts due to the low income, and this element of my pension pots does not need to be low risk to the capital.

Do you have dependants?
I am the same age as you and have a wife.
I intend to use my SIPP to 5-6% in dividend income as drawdown (instead of an annuity) in a year or two.
This means that if I die my wife will still get the same income.
I also realised that you can take 25% of the SIPP and put it into an ISA to generate tax free income.
It is easier if you have a wife then you can put in £40K in one year (or £80K if you do it close to a tax year boundary).

It's not actually a SIPP, it is managed by a financial planning firm. ANd I have already taken out the 25% tax free element, so anything I take out will be taxed.

The AI response is very impressive. It’s generalised but that’s to be expected.

You, and others, have mentioned the risks of a market crash. There is a very specific risk when you’re starting out: sequence of return. If the market crashes, say, 40% early on it’s a disaster. If that happens near the end you’ve hopefully banked the return.

As the AI suggests simulation tools can be very helpful here but they are still only multiple simulations and you are a specific case.

Steve

You are correct, the main attraction of an annuity would be to protect against the risk of a market crash. If I continue with funds (either selected by a firm or by myself), it would be with the knowledge that a crash would dictate a long term approach to await recovery - recovery that would possibly not occur in my lifetime, but hopefuly would for the children.

I think that as the previous answers say, it is really a personal decision.

However I was struck by your original post, in which you suggested that you would be able to live more extravagantly when you start drawing your state pension. I think you should give serious consideration to drawing a greater income now - whatever means you use to do it - as you cannot guarantee that you and your wife will be in a postion to enjoy the greater income later on. This figures greatly in my mind as I am 58 and retired, specifically to make sure that I enjoy life now, rather than postponing retirement to have a greater income later on - even though I hope that I will be enjoying it for many years yet.

You've hit the nail on the head, and why I am thinking about dipping into the pot now (whether annuity or just drawdown). I expect in 10 years time I'll be less able to enjoy holidays.

Ancient retiree (78- rtd 20+ years)
An annuity has a place but……
An investment portfolio will do as well if properly managed (probably better)and capital is maintained
Annuities have a place later on in a retirees life to ensure income lasts for ever especially as one ages and managing money is more difficult
I wouldn’t use an annuity unless you felt your income was under threat ie not enough etc
Have a simple portfolio of a global equity index tracker and a global bond index tracker fund hedged to the pound in a 60/40 asset allocation-fund units can then be sold if required at a later date-very flexible cheap and easy to manage and understand
This portfolio or part of it could always be annuitised at a later time if required when annuity rates will be better due to your age
xxd09

That ws my thinking last year when the suggestion first arose. However
- given the current annuity rates, would the gap between annuity income and pot performance/drawdown potential be reduced, and possibly eliminated if my pot wasn't well managed?
- The fixed term annuity really looks like protection against a downturn in the markets, so really I would be paying to reduce risk of what is available to my children in 10+ years...

Then again...
- If I took an lifetime annuity, and fed it into ISAs every year, on death would these ISAs be available tax-free to my children? (as opposed to getting a taxable pension from the pot),

ISAs will be included in the value of your estate so potentially will attract inheritance tax. ISAs can, in effect, be transferred to a surviving spouse (strictly speaking your spouse gets an additional ISA allowance equal to the value of your ISAs) but otherwise there are no tax advantages on death.

Thanks, that was something I wasn't really thinking about up to now. It is unlikely to be a problem, as long as I bear in mind how much I m drawing down, and what measures I take, e.g. gifting from surplus income.


Thanks everyone, you have given me food for though with your comments. As suggested above, I'll need to dig deeper into simulations/modelling.

Keep them coming
elkay