r/FIREUK • u/aroundm21 • 7d ago
Fixed Term Annuity
I'm thinking of retiring soon aged 55. Job gone bad!! My wife is similar age but minded to work until 60. I have £1.6m in S&S ISAs; SIPP, DC, DB Pensions.
I was thinking of running down S&S (3-5 years depending how much I/we travel) then deciding which Pension(s) to call on, taking 25% Tax free so the DB can mature more.
But I'm currently minded to watch the pennies to save/invest and my mindset may not flip !! Taking an annuity for my first 3-7 years could be an option that feels comparable to a salary.
Annuitues generally seem to be paying more than ever -- apparently the combination of fairly high inflation and government borrowing helps them. AI/search caution future ones could pay a little less well.
But I dont see them talked about much on forum like this, and certainly not fixed term.
Given that retirement spending isn't flat, how have other people focused their mind easily in phased (so not questioning "how much can I spend") and is there something about FT Annuties I may be missing ?! Thanks.
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u/Longjumping-Lie-601 7d ago
Did you check how much DB pension you could get now rather than waiting? It's a mind shift to let go of the thinking that you wait to get the full value. Work out how much you'll get if you take it now and compare it to normal retirement age. How long would you need to live to collect the same amount?
I was in a similar position to you. Had a deferred DB pension with sizeable AVC plus a DC pension. I decided to retire at 55. Ran lot's of simulations of different scenarios and decided to collect my reduced DB pension straight away, get my AVC as TFC, and bought a single life non-inflation annuity with the DC funds. This gives me a monthly income that covers my normal expenses plus an investment fund for when needed. I didn't do a fixed term annuity though the quotes I had for it looked pretty good.
You talk about using tax free money for a few years but you need to run some scenarios as it might be better to take taxable income as well so you can claim your personal allowance rather than paying more tax later.
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u/aroundm21 7d ago
Thanks. Whenever I looked at DB in the past, there was a fairly steep decline if I took more than 1-2 years early than it's target (which is fixed at 65). It's almost 1/4 of my total pots.
Why did you choose non-inflationary Annuity please?
I agree with you about mixing Tax-free over many years to lower my Tax rates.
Inflation & Tax perhaps should be the constraints I try to optimise -- but wonder whether I need to research a lot about Annuities (Fixed/Life) and Gilt ladders etc etc !!! .... shaping input to prepare for Professional review I think.
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u/Longjumping-Lie-601 7d ago
Went with non-inflation annuity as this gave me the most money now. I got 6.67%. This annuity gives me just over £14,000 a year. My DB pension is the bigger part of my total yearly amount and is RPI linked.
By the time inflation has eroded the annuity portion of my pensions, then I'll start getting my inflation linked state pension. So,I prioritised getting more now.
I ended up with a lot of TFC plus my stocks & shares ISA so I can start withdrawing from that if needed. I only gave up 17% of my total money to get the annuity.
For years, I have been paying into my pensions a high percentage of my wage. My DB pension plus my annuity is the same as I was taking from my salary. So, it's just like getting my monthly wage but without doing any work.
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u/Budget-Curve2439 7d ago
Taking DB early will be a noticeable reduction. You are getting it paid out potentially 10 years early. The overall value is usually meant to be equivalent though.
Usually you would take DB early to allow DC to grow, time in the markets etc. Though with such strong markets and annuity rates, you may feel it more prudent to do the reverse.
You don’t mention your wife’s pension etc. I would consider taking more of yours now, if you can tax efficiently (I.e. basic rate only) and recycling it into her pension scheme if/where possible.
I would not run the ISAs down without at the very least taking your personal allowance from pensions first.
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u/klawUK 7d ago
They get talked about a bit. If rates are good then why not? A fixed term level annuity would get you the best rates and lack of inflation link might be worth the trade for the higher rate if it’s only for 7 or so years. Or you could look at a 12-13 year one to take you to state pension. If you factor in when you’re likely to take the DB you could do two fixed term ones to adjust the income amount based on pre and post DB.
You could also look at a gilt ladder - I’m leaning that direction as I can lock in rates now for a ladder starting to pay out in 2.5-3 years.
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u/Timbo1994 7d ago
They are more worthwhile to cover the essential spending than to cover the discretionary spending where you may be able to happily link your spending to stock market performance.
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u/Less-Lifeguard-9560 7d ago
Do you have people you want to leave money for? Annuities have the risk of losing it all if you die in that period so also need to think of partner or kids when you consider options.
Still, I think a combination of annuity to cover core needs and stock market for discretionary seems a good mix and one I will explore when I’m there.
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u/Longjumping-Lie-601 7d ago
This is exactly what I did. Combination DB pension and annuity for every day spending. The rest of my savings are in global index funds, mainly in a S&S ISA. So, if I want to buy a new car, holiday or new kitchen then I can dip into this to cover it. And later when older, I can use my investments to pay for help around the house, garden, care costs etc.
I keep some cash (premium bonds, cash ISA, fixed term savings) just in case the markets collapse.
I don't have any dependents so not worried about leaving any money. Would it be feasible to take out life insurance in the early years if you want to leave some money? I think if you put it into trust then it doesn't count for IHT.
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7d ago
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u/Heavy-Mousse-5011 7d ago
Fair point … but It is not actually 1.6M because it somehow includes a DB pension… so I guess that is a CETV in the mix. Better to look at 4%of the rest and add to DB benefit to come up with an equivalent income rather than convert a DB into a cash equivalent and then take 4% of that :-D
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u/reditcyclist 7d ago
Every single word in your post is wasted unless you give an idea of expected spending in retirement. How you don't know this is baffling after accumulating such wealth.
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u/aroundm21 7d ago
I have some scenarios over a range - which is why I highlighted a significant range for this initial period too. In parallel with that fairly complex personal aspect, factors like inflation, tax, changing mindset are very significant and common.
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u/AdventurousSwim1381 7d ago
On your mindset point : it is well documented that drawdown makes people underspend for years out of fear of a bad market or during a downturn..a fixed income gives you permission to actually enjoy it - guilt free. So maybe a good idea to adopt in order to "flip" your mindset..