Fixed-term annuity question

[Gilgongo]

I'm 56, and currently planning to use a "cash bridge" of about £85K over 10 years to cover an income shortfall from investments until the state pension kicks in for me and the wife (she's a bit older than I am).

Out of curiosity, I had a look at this site, and found that a fixed-term annuity bought with £85K might pay out £105K over a 10 year term:

https://www.moneyhelper.org.uk/en/pensi ... -annuities

The downside being that if I die before the end of the term the annuity would go with me. But I'm in good health, so for £20K free money (about half a year's expenditure) that seems like a risk I'd be willing to take.

Or have I got all this wrong? Until now I assumed annuities were bad value. Mind you, it doesn't say if it might be index linked or noffink so maybe it's not as good as it seems?

[DrFfybes]

If it didn't say index linked then I'd assume not.

The maths don't seem far off, £85k with a 3% return and 10k withdrawn pa would last just under 10 years.
Assume 4% annual return and you take £10.5k pa then similar result.

You could DIY and just put it in a pot of VHYL/VEVE and get Vanguard to autosell each month to give you your required income (or do it manually).
So, do you feel lucky?

Paul

[Gilgongo]

If it didn't say index linked then I'd assume not.

The maths don't seem far off, £85k with a 3% return and 10k withdrawn pa would last just under 10 years.
Assume 4% annual return and you take £10.5k pa then similar result.

Oh OK that makes sense. For a moment there I thought I'd discovered something. Glad I checked

[frugal90]

"does anyone know if it is possible to buy a five year fixed term annuity direct without using a financial adviser??"

interesting question being asked on the citywire forum, I guess the person wants to try and cut out the broker and see if they can negotiaie the broker fee as part of their income payout, or similar

[mc2fool]

I'm 56, and currently planning to use a "cash bridge" of about £85K over 10 years to cover an income shortfall from investments until the state pension kicks in for me and the wife (she's a bit older than I am).

Out of curiosity, I had a look at this site, and found that a fixed-term annuity bought with £85K might pay out £105K over a 10 year term:

https://www.moneyhelper.org.uk/en/pensi ... -annuities

The downside being that if I die before the end of the term the annuity would go with me. But I'm in good health, so for £20K free money (about half a year's expenditure) that seems like a risk I'd be willing to take.

Or have I got all this wrong? Until now I assumed annuities were bad value. Mind you, it doesn't say if it might be index linked or noffink so maybe it's not as good as it seems?

Interesting ... yes, better than I'd expected too. I think it's clear it's not index linked, at least the example I tried.

I stuck in £85K, pretended I was 56 on 1-Jan this year and said I wanted it immediately. Paid annually in arrears that'd give me £10,870pa for the ten years, and paid monthly in arrears £10,617pa. Shoving those flows into XIRR I get 4.74%pa and 4.26%pa respectively.

You could probably do better with a ladder of gilts, choosing low coupon ones and so pay very little in income tax, taking the return as capital gain (which is tax free for gilts).

[Alaric]

You could probably do better with a ladder of gilts, choosing low coupon ones and so pay very little in income tax, taking the return as capital gain (which is tax free for gilts).

The XIRR for a ladder of Gilts would likely come out as near the average of their redemption yields. At a youngish age, the extra return from the loss of capital with an annuity if the recipient fails to survive isn't very great. Annuity providers can invest in higher yielding bonds than gilts by virtue of pooling investment risk, how muvh of this is passed on to the annuitant is another matter.

[mc2fool]

You could probably do better with a ladder of gilts, choosing low coupon ones and so pay very little in income tax, taking the return as capital gain (which is tax free for gilts).

The XIRR for a ladder of Gilts would likely come out as near the average of their redemption yields. At a youngish age, the extra return from the loss of capital with an annuity if the recipient fails to survive isn't very great. Annuity providers can invest in higher yielding bonds than gilts by virtue of pooling investment risk, how muvh of this is passed on to the annuitant is another matter.

Yes, but my point was that whereas the income from the annuity is potentially liable to income tax at 0/20/40/45% (depending on individual situation of course), building a ladder of low coupon gilts could give a much better net return (also depending on individual situation of course ).

[Alaric]

Yes, but my point was that whereas the income from the annuity is potentially liable to income tax at 0/20/40/45% (depending on individual situation of course), building a ladder of low coupon gilts could give a much better net return

There's a long standing concession applying to annuity taxation outside of pension funds. It's that part of each payment is taxed as being a return of capital. In other woirds only part of the annuity income is taxable, The magic word is "capital content",

[mc2fool]

Yes, but my point was that whereas the income from the annuity is potentially liable to income tax at 0/20/40/45% (depending on individual situation of course), building a ladder of low coupon gilts could give a much better net return

There's a long standing concession applying to annuity taxation outside of pension funds. It's that part of each payment is taxed as being a return of capital. In other woirds only part of the annuity income is taxable, The magic word is "capital content",

Ah, I've just learned something, thanks. Still, on the assumption that the part that isn't a return of capital (the £20Kish in this example) is taxed as income, the low coupon gilts approach may still work out better. YMMV.