The Lemon Fool

Nadolig Llawen / Merry Christmas!

Last week I ran an annuity quote with Hargreaves Lansdown with 50% spouse and uncapped RPI escalation for my crystallised SIPP and the annuity rate is coming out at 3.4%.

We are aged 58 and 57.

The rate is still valid today.

This isnt much less than the so-called 4% safe withdrawal rate.

I would be unwilling to retire based on 4% but with a guaranteed income (albeit slightly lower) removing the stress of watching your pension pot go up and down like a yo-yo, the annuity when combined with my two DB pensions already in payment (inflation capped at 5%, less when GMP kick in) would give a very decent income (greater than my post salary sacrifice salary due to large pension contributions) that could allow me to retire pretty much now, and end OMY syndrome.

Anyone got any thoughts on this?

Never thought I would even consider annuitisation, but the rate on offer has gone up by nearly 70% in the last year!

A nice “problem” to have I suppose!

OMY?

So you've started drawing on your DB pensions even though you're still working? And you've already drawn from your SIPP?

Are you and your partner both already up to the max for your state pensions? Have you figured how that'd affect your income then, and up to then?

mc2fool wrote:OMY?

One More Year. I see traits that I might be suffering from it myself. Pretty sure I am FI but I like the pension offer from work and employment allows me to add more to the pot. This time next year I'll hopefully be out or elsewhere.

mc2fool wrote:OMY?

So you've started drawing on your DB pensions even though you're still working? And you've already drawn from your SIPP?

Are you and your partner both already up to the max for your state pensions? Have you figured how that'd affect your income then, and up to then?

Yes, I took the two DB at 55 and 57 (unable at 55 due to GMP issue) due to LTA issues. Didn’t help but reduced the problem somewhat.

Both state pensions maximised.

Probably have too much income at state pension age. Could keep £200k or so in drawdown (and invested cautiously) to cover the state pension amounts for the two of us up to SPA and use the rest of the sipp to buy an index limked joint life annuity. This would avoid a big jump in benefits at SPA which may not necessarily be needed?

Of course, drawdown may well provide a better total income but the risk is greater.

If you have “won the game”, is there a point in taking unnecessary risk?

certainly worth considering if you are near LTA, and any outperformance by equity is going to taxed at 40 or 55%. I expect an annuity is safer from a government raid too.

Myfyr wrote:

mc2fool wrote:OMY?

So you've started drawing on your DB pensions even though you're still working? And you've already drawn from your SIPP?

Are you and your partner both already up to the max for your state pensions? Have you figured how that'd affect your income then, and up to then?

Yes, I took the two DB at 55 and 57 (unable at 55 due to GMP issue) due to LTA issues. Didn’t help but reduced the problem somewhat.

Both state pensions maximised.

Probably have too much income at state pension age. Could keep £200k or so in drawdown (and invested cautiously) to cover the state pension amounts for the two of us up to SPA and use the rest of the sipp to buy an index limked joint life annuity. This would avoid a big jump in benefits at SPA which may not necessarily be needed?

Of course, drawdown may well provide a better total income but the risk is greater.

If you have “won the game”, is there a point in taking unnecessary risk?

It depends whether you want to leave anything to beneficiaries after both you and your partner are gone. Both the annuity and DB pensions will provide nothing for beneficiaries whereas anything left in the Sipp can be inherited.

ursaminortaur wrote:

Myfyr wrote:

mc2fool wrote:OMY?

So you've started drawing on your DB pensions even though you're still working? And you've already drawn from your SIPP?

Are you and your partner both already up to the max for your state pensions? Have you figured how that'd affect your income then, and up to then?

Yes, I took the two DB at 55 and 57 (unable at 55 due to GMP issue) due to LTA issues. Didn’t help but reduced the problem somewhat.

Both state pensions maximised.

Probably have too much income at state pension age. Could keep £200k or so in drawdown (and invested cautiously) to cover the state pension amounts for the two of us up to SPA and use the rest of the sipp to buy an index limked joint life annuity. This would avoid a big jump in benefits at SPA which may not necessarily be needed?

Of course, drawdown may well provide a better total income but the risk is greater.

If you have “won the game”, is there a point in taking unnecessary risk?

It depends whether you want to leave anything to beneficiaries after both you and your partner are gone. Both the annuity and DB pensions will provide nothing for beneficiaries whereas anything left in the Sipp can be inherited.

There is a house and big fat share ISA for inheritance purposes.

JohnB wrote:certainly worth considering if you are near LTA, and any outperformance by equity is going to taxed at 40 or 55%. I expect an annuity is safer from a government raid too.

Yes, this is something i had considered. An annuity is essentially a DB pension in payment, harder to get raided than a DC pot!

Myfyr wrote:Yes, this is something i had considered. An annuity is essentially a DB pension in payment, harder to get raided than a DC pot!

Any likely raid on those in receipt of pension income would most likely be an increase to the Income Tax rates or a reduction in the tax free allowance. But maybe a DC pot could be hit by a taxable notional withdrawal rate.

kempiejon wrote:

mc2fool wrote:OMY?

One More Year. I see traits that I might be suffering from it myself. Pretty sure I am FI...

FI?

Myfyr wrote:Yes, I took the two DB at 55 and 57 (unable at 55 due to GMP issue) due to LTA issues. Didn’t help but reduced the problem somewhat.

Both state pensions maximised.

Probably have too much income at state pension age. Could keep £200k or so in drawdown (and invested cautiously) to cover the state pension amounts for the two of us up to SPA and use the rest of the sipp to buy an index limked joint life annuity. This would avoid a big jump in benefits at SPA which may not necessarily be needed?

Of course, drawdown may well provide a better total income but the risk is greater.

If you have “won the game”, is there a point in taking unnecessary risk?

OTOH if you are secure with your income then you can afford to take risk with the excess. You don't give exact breakdowns (and I'm not expecting you to) but, yes, the purpose of my income-with-state-pension question was to possibly suggest something similar, albeit not quite that.

If your two DBs plus two state pensions (and you don't mention if your partner also has any non-state pension(s)) will give you more than enough income at SPA then, yes, put whatever is needed to cover the two of you up to then into something boring and cautious and draw from that. But what's the point of using the rest to buy an annuity? I'd say carry on just investing the rest, maybe less cautiously.

BTW, if you're thinking of LTA issues, my understanding is that annuities are counted in the LTA calculations. Here's one source: https://techzone.abrdn.com/public/pensions/Guide-pension-lifetime-allowance

mc2fool wrote:

kempiejon wrote:

mc2fool wrote:OMY?

One More Year. I see traits that I might be suffering from it myself. Pretty sure I am FI...

FL?

Myfyr wrote:Yes, I took the two DB at 55 and 57 (unable at 55 due to GMP issue) due to LTA issues. Didn’t help but reduced the problem somewhat.

Both state pensions maximised.

Probably have too much income at state pension age. Could keep £200k or so in drawdown (and invested cautiously) to cover the state pension amounts for the two of us up to SPA and use the rest of the sipp to buy an index limked joint life annuity. This would avoid a big jump in benefits at SPA which may not necessarily be needed?

Of course, drawdown may well provide a better total income but the risk is greater.

If you have “won the game”, is there a point in taking unnecessary risk?

OTOH if you are secure with your income then you can afford to take risk with the excess. You don't give exact breakdowns (and I'm not expecting you to) but, yes, the purpose of my income-with-state-pension question was to possibly suggest something similar, albeit not quite that.

If your two DBs plus two state pensions (and you don't mention if your partner also has any non-state pension(s)) will give you more than enough income at SPA then, yes, put whatever is needed to cover the two of you up to then into something boring and cautious and draw from that. But what's the point of using the rest to buy an annuity? I'd say carry on just investing the rest, maybe less cautiously.

BTW, if you're thinking of LTA issues, my understanding is that annuities are counted in the LTA calculations. Here's one source: https://techzone.abrdn.com/public/pensions/Guide-pension-lifetime-allowance

Yes there will be an LTA calculation, and unfortunately an LTA charge on my DC growth post crystallisation, unavoidable (no LTA headroom left), but i have allowed for this in my calculation of the value of the DC pot available to buy the annuity. Of course there will be no LTA calc at age 75 if the DC pot has been exhausted.

Uncapped RPI linked annuity at 58 for 3.4% and 50% spouse benefit sounds like an excellent deal to me. Nothing to worry about ever again.

mc2fool wrote:FI?

Financial Independence

BullDog wrote:Uncapped RPI linked annuity at 58 for 3.4% and 50% spouse benefit sounds like an excellent deal to me. Nothing to worry about ever again.

This provider offers a much higher rate on Hargreaves’ portal than the others, which are about 20% lower.

Of course I have to kiss goodbye to a substantial crystallised DC pot as a result!

What price for peace of mind?

BullDog wrote:Uncapped RPI linked annuity at 58 for 3.4% and 50% spouse benefit sounds like an excellent deal to me. Nothing to worry about ever again.

Note: In 2030 RPI will effectively become CPIH.

https://www.professionalpensions.com/news/4055653/updated-court-dismisses-judicial-review-decision-replace-rpi


The High Court has dismissed the judicial review of the decision by the UK Statistics Authority and Chancellor to align the Retail Prices Index (RPI) with the housing cost-based version of the Consumer Prices Index from 2030.
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.
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Responding to the judgment, a spokesperson for the schemes said: "We are disappointed that the UKSA has been allowed to align the RPI with CPIH from 2030 without proper consultation and consideration of the impact such a decision will have on schemes holding RPI index-linked bonds and the retirement incomes of their members.

"Many investors, including pension funds, bought index-linked gilts in good faith and now face losses of £90 to £100bn."
.
.
.
"Insight and a broad range of market participants highlighted significant concerns about the proposals during the government's 2020 consultation. It was of no surprise that three UK defined benefit pension funds felt they had no choice but to challenge the government's decision, which will result in a transfer of wealth in the region of £100bn from index-linked gilt holders (largely pension funds) to the government."

Vermeulen added: "This will reduce pension transfer values and lifetime incomes by 10% to 15% or more. With inflation surging many pensioners are already struggling and RPI reform represents an additional and entirely unnecessary blow."

ursaminortaur wrote:

BullDog wrote:Uncapped RPI linked annuity at 58 for 3.4% and 50% spouse benefit sounds like an excellent deal to me. Nothing to worry about ever again.

Note: In 2030 RPI will effectively become CPIH.

https://www.professionalpensions.com/news/4055653/updated-court-dismisses-judicial-review-decision-replace-rpi


The High Court has dismissed the judicial review of the decision by the UK Statistics Authority and Chancellor to align the Retail Prices Index (RPI) with the housing cost-based version of the Consumer Prices Index from 2030.
.
.
.
Responding to the judgment, a spokesperson for the schemes said: "We are disappointed that the UKSA has been allowed to align the RPI with CPIH from 2030 without proper consultation and consideration of the impact such a decision will have on schemes holding RPI index-linked bonds and the retirement incomes of their members.

"Many investors, including pension funds, bought index-linked gilts in good faith and now face losses of £90 to £100bn."
.
.
.
"Insight and a broad range of market participants highlighted significant concerns about the proposals during the government's 2020 consultation. It was of no surprise that three UK defined benefit pension funds felt they had no choice but to challenge the government's decision, which will result in a transfer of wealth in the region of £100bn from index-linked gilt holders (largely pension funds) to the government."

Vermeulen added: "This will reduce pension transfer values and lifetime incomes by 10% to 15% or more. With inflation surging many pensioners are already struggling and RPI reform represents an additional and entirely unnecessary blow."

Thanks, I was aware rpi was going but I wasn’t sure what was going to replace it.

As expenditure reduces in real terms with age, allegedly, perhaps a fixed escalation rate option of 3% might be better? Your income goes up, but generally reduces slightly in real terms?

Looks like I may get an extra 10% uplift to the starting annuity if run on that basis.

Myfyr wrote:

mc2fool wrote:If your two DBs plus two state pensions (and you don't mention if your partner also has any non-state pension(s)) will give you more than enough income at SPA then, yes, put whatever is needed to cover the two of you up to then into something boring and cautious and draw from that. But what's the point of using the rest to buy an annuity? I'd say carry on just investing the rest, maybe less cautiously.

BTW, if you're thinking of LTA issues, my understanding is that annuities are counted in the LTA calculations. Here's one source: https://techzone.abrdn.com/public/pensions/Guide-pension-lifetime-allowance

Yes there will be an LTA calculation, and unfortunately an LTA charge on my DC growth post crystallisation, unavoidable (no LTA headroom left), but i have allowed for this in my calculation of the value of the DC pot available to buy the annuity. Of course there will be no LTA calc at age 75 if the DC pot has been exhausted.

Ok, but you haven't answered my point above. Once you start getting your state pensions, will those plus your DB pensions (plus any your partner has) provide "enough" income for you?

If so, what's the point of the annuity? If not, how much of a shortfall will there be? Let's say, expressed as the %pa draw you'd have to make from your remaining SIPP, at SPA?

mc2fool wrote:

Myfyr wrote:

mc2fool wrote:If your two DBs plus two state pensions (and you don't mention if your partner also has any non-state pension(s)) will give you more than enough income at SPA then, yes, put whatever is needed to cover the two of you up to then into something boring and cautious and draw from that. But what's the point of using the rest to buy an annuity? I'd say carry on just investing the rest, maybe less cautiously.

BTW, if you're thinking of LTA issues, my understanding is that annuities are counted in the LTA calculations. Here's one source: https://techzone.abrdn.com/public/pensions/Guide-pension-lifetime-allowance

Yes there will be an LTA calculation, and unfortunately an LTA charge on my DC growth post crystallisation, unavoidable (no LTA headroom left), but i have allowed for this in my calculation of the value of the DC pot available to buy the annuity. Of course there will be no LTA calc at age 75 if the DC pot has been exhausted.

Ok, but you haven't answered my point above. Once you start getting your state pensions, will those plus your DB pensions (plus any your partner has) provide "enough" income for you?

If so, what's the point of the annuity? If not, how much of a shortfall will there be? Let's say, expressed as the %pa draw you'd have to make from your remaining SIPP, at SPA?

Ok, sorry ….

(1) DB plus SP’s alone, no. But if I annuitised just half the pot for half the annuity the total would be adequate.

(2) Annuitising the whole pot would remove sequence risk and longevity risk I suppose. And not having to stress out at the markets depleting the DC pot (I have an ISA to stay in the markets). And the total guaranteed income would give a comfortable, but not luxurious, retirement.

Despite having a nice crystallised DC pot, it is difficult to kick the OMY syndrome. Having a guaranteed annuity income solves that, possibly (or probably), at the expense of lower expected lifetime income overall.

Any excess income can just be fed back into an ISA.

If you buy an annuity, your money has gone but you do have that guaranteed income.

Invest it properly and you can have a higher income and retain your capital, which may well grow.

The choice is yours.

TJH

mc2fool wrote:

Myfyr wrote:

mc2fool wrote:If your two DBs plus two state pensions (and you don't mention if your partner also has any non-state pension(s)) will give you more than enough income at SPA then, yes, put whatever is needed to cover the two of you up to then into something boring and cautious and draw from that. But what's the point of using the rest to buy an annuity? I'd say carry on just investing the rest, maybe less cautiously.

BTW, if you're thinking of LTA issues, my understanding is that annuities are counted in the LTA calculations. Here's one source: https://techzone.abrdn.com/public/pensions/Guide-pension-lifetime-allowance

Yes there will be an LTA calculation, and unfortunately an LTA charge on my DC growth post crystallisation, unavoidable (no LTA headroom left), but i have allowed for this in my calculation of the value of the DC pot available to buy the annuity. Of course there will be no LTA calc at age 75 if the DC pot has been exhausted.

Ok, but you haven't answered my point above. Once you start getting your state pensions, will those plus your DB pensions (plus any your partner has) provide "enough" income for you?

If so, what's the point of the annuity? If not, how much of a shortfall will there be? Let's say, expressed as the %pa draw you'd have to make from your remaining SIPP, at SPA?

Agree, if you will have enough to live on with you're existing or projected income, I would keep this as a lump sum and treat myself to a really nice car or flash holidays for the family. Enjoy it while you can. You wont need it when you're 80.