2.7 I hate annuities

annuity
This picture makes me laugh. Thanks to LV.com

Chapter Overview
All about annuities

As of April 2015, UK pensions are changing.  You will no longer be required to buy an annuity with at least 75% of your pension pot (if you’re over 55) – hurrah!

This chapter makes the point that not all annuities are evil, and they’re certainly not all created equal.

In the US, the annuity comparison site lifetimeincome.com is easy to use, is there anything similar for the UK?

Yes!  The Money Advice Service have an easy-to-use annuity comparison tool.  I typed in a few (made-up) numbers and got this back in under 2 minutes

annuity quotes

For once, that was an easy like-for-like replacement, and, they’ve a whole section on saving and investing – worth an in-depth mooch.

Chapter 2.7 of the book also mentions something called a 1035 exchange which is a tax free way (in the US) of swapping an old annuity contract for a new one.

It appears that in the UK, once you have purchased an annuity contract, you’re stuck with it.  There’s no way out – much less a tax-free option. Source: This is Money.

Personally, I think annuities have a place – especially now that we have more flexibility about how much of the pension pot to use to buy one.

I think an ideal arrangement would be something like:

  1. Take 25% of the pension pot tax-free – spend or reinvest – maybe in an ISA?
  2. Buy an index-linked joint annuity which covers our basic living costs.
  3. Drawdown on the remainder (if any) of the pension pot at a safe withdrawal rate of (say) 3% per annum to provide an income for non-essentials.

One of the hardest things to gauge is how healthy we will be in our old ages and how much any medical care might cost at an unspecified point in the future etc, etc.

However, despite that cloud on the horizon, this seems like a good way to start ..

A quick update.  I put some real numbers into the annuity comparison tool – and they really suck!

As a rough guide, with a SWR of 3%, you’d need £400K in a pension pot to enable you to draw down £1,000 (before income tax) per month without eroding the capital.

For an inflation-adjusted joint annuity – you’d need more than double that amount – closer to £800K. Oh, and when you die, you have no capital left for your heirs (which may or may not bother you).

So, keep £400K in my pension pot and manage my own income, or give £800K to an insurance company and lose all control of it.

I’m rethinking annuities ..