Level Annuity: Why?

"Chris Gordon-Smith" wrote

Because they want more income earlier & don't mind getting less later?

"Chris Gordon-Smith" wrote

Yep, but you get more initially than you would have if it increased.

Indeed, but why would one expect required income to reduce?

Chris Gordon-Smith

"Chris Gordon-Smith" wrote

Who says one would?

Because the extra cost of an indexed annuity means that it takes something like 15-20 years before the indexed annuity provides a total return exceeding that of a flat annuity assuming an inflation rate of

So if you are living partly on an annuity and partly on your savings higher income earlier means less out of savings earlier and therefore more time to provide greater investment growth.

Of course if you had an enormous pension pot it could well be sensible to go completely for an indexed annuity. But most people arent so lucky.

Mike

Thanks for this. My thought so far is that I would live on the annuity, with any savings being for unexpected expenses / emergencies. It seems to me that the problem with relying on savings is that there is usually no way to gauge how fast to spend them (because most people don't know how long they are going to live).

Chris Gordon-Smith

That seems to be the implication of taking a level annuity.

Chris Gordon-Smith

Because the older you get the less mobile you become, so there will be less "pleasure" activities that you can take part in.

The Government will pick up the bill for your increasing health needs, but it won't pay for your leisure trips.

tim

Thanks. Hmmm. I don't think there is any ongoing guarantee that the gevernment will pickup the bill for health needs. Even where they do, they currently only provide what they consider to be essential.

My preference would be to keep the *real* income level. If this means not going on a world cruise in the early years of retirement then I can live with it.

Chris Gordon-Smith

"Chris Gordon-Smith" wrote

How does taking a level annuity imply that required (real) income is expected to reduce?

As you said earlier "... they want more income earlier & don't mind getting less later?"

Chris Gordon-Smith

"Chris Gordon-Smith" wrote

Yes. They want more earlier & less later, yet they can expect required income to increase, fall or stay the same.

Eg they might only require a lower income than they receive from the annuity, or might receive other income which tops-up the annuity...

In message , Tim writes

They may also think that once they have received it and spent it, it cannot be taken away from them. :-)

In message , Chris Gordon-Smith writes

Annuity and pension actuaries have a pretty good idea, the trick is to beat 'em by keeping fit. :)

My father died in service aged 60, so I took the opportunity to retire at 58 and I've had over 17 years of pension, probably taken more out of the scheme than I put in. Had to do something to avenge Dad!

I'm glad to hear it! But has your real income reduced over the years? If not, how did you avoid this?

Chris Gordon-Smith

Isn't this a horrid time to buy an annuity?

I don't suppose I did! My capital is now about £11,000 less than when I retired in 1991 and took the maximum up-front tax free sum out of my company pension. That ignores inflation, but I have changed my car three times since I retired, one a new model, and had holidays abroad.

Basically, I just kept out of debt, except when I bought a brand new Cavalier on a 50% down and 50% in two years deal (Nought % interest).

The final payment was about one month after a Tessa matured.

I resolutely avoided the advice given by Financial Advisors except the one who said: "Whatever you decide to do financially, banish these two words out of your vocabulary, - 'If only'" . :)

I initially thought it would be a good idea to take a small lump sum, and a larger pension, but I suppose having the lump sum available gives you some flexibility.

That bit I like! But I am sceptical about financial advisors. The last one I spoke to was very keen to take over the running of my investments. I wonder to what extent they are really advisors, and how much they are motivated by selling.

Some independent advice would be useful, but in the end I think I need to make my own decisions. And that will entail understanding what a corporate bond is, what the pros and cons of RPI linked annuities are, etc., etc, etc.

Chris Gordon-Smith

Because if you have a combination of retirement investments and you want to retire early it can be a useful way of getting more money in the years before your state pension kicks in.

Eg say you want 20k in retirement and want to retire at 55. You have a final salary pension from an old job worth 12k at 55, and 100k in a defined contribution plan, plus 40k in ISAs. State pension (inc SERPS) of 7500 at 65.

You can choose a level or index linked annuity with the DC money.

The final salary plus state pension (both index linked) will provide almost all you need at 65 onwards, so it doesn't really matter if the DC pension is worth almost nothing at 65. You want more money before you get the state pension. If you take a level annuity with your DC money you'd probably be able to spend 20k a year in todays terms for the rest of your life, if you take an index linked annuity you probably won't.

Thanks for this. Its beginning to make sense. I think I need a financial model to try out all the 'What Ifs'. I suppose I could knock up some kind of spreadsheet, but I wonder whether there is a ready-made one I can get from somewhere.

Chris Gordon-Smith