Annuity or not?
Posted: December 17th, 2020, 6:58 pm
I would like to retire but am in a bit of a quandary as to how to use a defined contribution personal pension: buy an annuity or put it into drawdown?
At the start of 2020 I wanted to retire, but my employers asked if I would consider working three days a week. I decided to try that for a few months but then the pandemic happened and I am still at it although not enjoying the experience of working from home, which has come to feel like three days of house arrest per week. My intention had been to take the defined contribution pension that my employer and I pay into and put that into a SIPP and use drawdown. In 2019 I had also inherited some money and at the start of 2020 I put £190k into a basket of investment trusts with the intention of using the dividends to support my retirement. This basket lost some value during the COVID downturn but has pretty much recovered and the dividends have kept coming - I cannot remember exactly how much I had been hoping to get from this but I don't think it's much below what I was hoping for and looks to be yielding about £8k p.a. and I am reasonably happy with it. In contrast, my stocks and shares ISA, which is mainly invested in UK equities, is still around 15% down from about £400k one year ago and has yielded just nearly £11k in dividends this year whereas I think I got about £16k from it last year So, having seen what events can do to one’s investments the secure income offered by an annuity seemed like a good idea earlier in the year. The thing I am in a quandary about is that I was diagnosed with lymphoma in 2011. I needed treatment in 2016 and then towards the end of the first lockdown I discovered that it had returned and I started treatment again in August which should hopefully finish in January. What is bugging me is whether an annuity is likely to be good value for someone in my position? The income will be secure, but I am not sure how likely I will be to get my money back, even at the enhanced rates that I have been quoted after providing my medical history. Back in 2011, I was told that lymphoma is slow growing, can be treated but not cured and I could hope to live for at least another twenty years – and I am nearly halfway through that now. I tried to have a conversation about my prognosis and expectations with my current haematologist, but he is only on a temporary contract and wants to wait for test results to see how effective the current treatment has been, which will probably be sometime in February.
Despite the effects of the downturn on my investments and my initial thoughts about annuities I am having doubts about that approach now and am coming back round to feel that the original plan to put my defined contribution pension into a SIPP and use drawdown might still be the best option. I also have a small frozen final salary scheme which is due to pay out when I reach the age of 65, in 2026. If I accessed that now, it would pay out around £8,000 p.a. but I can see from valuations that over the last two years, the amount it would pay has increased by around 10% p.a. So, I am inclined to hang on to that for now. I have no mortgage, no debt, no dependents and my partner is financially secure in her own right. There is no tearing hurry, but I would like to make a start. My defined contribution personal pension has recovered better than my other investments and is currently worth about £380k, which is more than it was worth at this time last year.
During the summer there appeared to be very little enthusiasm or planning for us to go back to the office; most of my colleagues seem to enjoy working from home but it has sucked all the enjoyment out of work for me. I will turn 60 in the new year and so it feels like a good time to press the button. I have been going round in mental circles over this for a while now and I think it’s about time that I actually did something. For one thing, I have to give three months' notice and if I don't make a start soon I'll still be doing three days a week when Spring arrives.
At the start of 2020 I wanted to retire, but my employers asked if I would consider working three days a week. I decided to try that for a few months but then the pandemic happened and I am still at it although not enjoying the experience of working from home, which has come to feel like three days of house arrest per week. My intention had been to take the defined contribution pension that my employer and I pay into and put that into a SIPP and use drawdown. In 2019 I had also inherited some money and at the start of 2020 I put £190k into a basket of investment trusts with the intention of using the dividends to support my retirement. This basket lost some value during the COVID downturn but has pretty much recovered and the dividends have kept coming - I cannot remember exactly how much I had been hoping to get from this but I don't think it's much below what I was hoping for and looks to be yielding about £8k p.a. and I am reasonably happy with it. In contrast, my stocks and shares ISA, which is mainly invested in UK equities, is still around 15% down from about £400k one year ago and has yielded just nearly £11k in dividends this year whereas I think I got about £16k from it last year So, having seen what events can do to one’s investments the secure income offered by an annuity seemed like a good idea earlier in the year. The thing I am in a quandary about is that I was diagnosed with lymphoma in 2011. I needed treatment in 2016 and then towards the end of the first lockdown I discovered that it had returned and I started treatment again in August which should hopefully finish in January. What is bugging me is whether an annuity is likely to be good value for someone in my position? The income will be secure, but I am not sure how likely I will be to get my money back, even at the enhanced rates that I have been quoted after providing my medical history. Back in 2011, I was told that lymphoma is slow growing, can be treated but not cured and I could hope to live for at least another twenty years – and I am nearly halfway through that now. I tried to have a conversation about my prognosis and expectations with my current haematologist, but he is only on a temporary contract and wants to wait for test results to see how effective the current treatment has been, which will probably be sometime in February.
Despite the effects of the downturn on my investments and my initial thoughts about annuities I am having doubts about that approach now and am coming back round to feel that the original plan to put my defined contribution pension into a SIPP and use drawdown might still be the best option. I also have a small frozen final salary scheme which is due to pay out when I reach the age of 65, in 2026. If I accessed that now, it would pay out around £8,000 p.a. but I can see from valuations that over the last two years, the amount it would pay has increased by around 10% p.a. So, I am inclined to hang on to that for now. I have no mortgage, no debt, no dependents and my partner is financially secure in her own right. There is no tearing hurry, but I would like to make a start. My defined contribution personal pension has recovered better than my other investments and is currently worth about £380k, which is more than it was worth at this time last year.
During the summer there appeared to be very little enthusiasm or planning for us to go back to the office; most of my colleagues seem to enjoy working from home but it has sucked all the enjoyment out of work for me. I will turn 60 in the new year and so it feels like a good time to press the button. I have been going round in mental circles over this for a while now and I think it’s about time that I actually did something. For one thing, I have to give three months' notice and if I don't make a start soon I'll still be doing three days a week when Spring arrives.