A common view that people have about annuities
are that when you retire, whatever you've saved
into your company pension over your life is taken
by that company and then converted into a monthly
payment that you get paid each month for the
rest of your life. Now, in the UK until 2015,
this is nearly what everyone did. Then In 2015
everything changed and they changed for the better.
The pension freedoms we received back in 2015
acknowledged that actually the money was ours
and that we should have much more choice in what
we decide to do with it. Now not everybody got
the memo on that and many people still actually
default to this option and Quite often employers
are kind of happy for people to do that. And
sometimes for people, these options seem difficult
or too risky for them to actually consider. The
thing is, I don't think the options are difficult
and the outcomes need not be particularly risky
either. I mean, I've been chatting to a few people
recently about how they use annuities and what
I learned is that annuities by themselves are
neither good nor bad. In fact they suit some
circumstances perfectly, whereas for other people
they are best avoid them completely. So what
I want to do, just to clarify things, I want
to run through two different scenarios. The first
guy is somebody who had contacted me via my website
and the other is, well, me. And you'll see what
I mean. So let's pretend the guy's name is Jim.
Now, Jim has six years until he gets his state
pension. Now he's due to get the full state pension
and he's pretty much worked as a caretaker all
his life, but early on his working career. He
worked in a school. From that he got a small
council pension, which was a confined benefit
pension, which is the same every year. And that'll
be about £3 ,000 a year. And he could claim that
if he wants to. He also, he's got a small house.
He paid off the mortgage a few years ago. Absolutely
loves life. He's got a ton of hobbies that he
likes doing. But he hates working at the moment
and his health unfortunately has dipped recently
and to be honest, he's desperate to spend more
time on his hobbies before he's worried that
his health might deteriorate anymore. Now he's
worked out that his budget is around £15 ,000
a year. He's never really driven He doesn't go
on holiday a lot or have expensive breaks, but
this 15 ,000 pound a year is the budget he thinks
will keep him comfortable. Now, after leaving
the school where he worked, he worked for a private
company for a while, and he always paid what
he could into his pension, which wasn't a lot
to be honest, and he's managed to accrue a pot
of 65 ,000 pound in total in his company pension.
Now is quandary as a choice between three things.
One, he's considering keep on working despite
his decline in health. Two, is to start drawing
down his pension about 11 ,000 pound a year until
the state pension then kicks in when he's 67.
Or three, to buy an annuity. So I asked him to
talk to me. how he felt about these options.
And what he said is the thought of continuing
working actually filled him with dread. He didn't
want to start a different job, a new kind of
job. Curtake in itself was, be going to be honest,
a bit physically too demanding for him due to
his decline in health. And also his employer
starts to become quite critical of his work output
as well. And now the second option. He had considered
drawing down his pension, but if he did that,
he could, he could only put 65 K into a hundred
percent safe investments because it's your timeframe,
six years, and he wouldn't feel comfortable in
taking any risks with a stock market because,
you know, stock markets within a six year period
can really go up and down quite a lot. This means
that with his 3k council pension per year, he'd
still be over a thousand pounds short each year
on his target. And this really is a worry for
him, to be honest. But option three is to take
out an annuity. Now, Jim, like many people first
thought that annuities were something that you
got for life. You know, maybe they'd offer him
a couple of thousand pounds a year for the rest
of his life, which obviously for the next six
years be No good for him at all. But of course,
they're not that. And he has an offer now from
an annuity company of nearly £12 ,000 per year
on a six -year annuity. And that will take up
until he gets his state pension. Now, if he adds
the £3 ,000 cancel pension, he gets close enough
to his target budget. Now, Jim's still considering
his options, but the annuity route is a real
option than he is considering. And for me, it
does kind of make some sense. Now, the second
scenario is me. And for me, annuity makes little
sense. I spent quite a lot of my career working
in councils and universities and hospitals, but
to keep things simple for this video, I'll call
all these defined benefit pensions my council
pension. When I add this council pension to my
state pension at 67, it's actually enough for
me. It kind of meets all the needs and I've got
a very detailed budget. And when you add the
council pension and the state pension together,
I'm absolutely fine. Now that means I won't need
to top it up with the private pension I have.
So I intend to spend all my private pension before
I reach 67. So I retired at 55 and I've still
got 11 years left before I get my state pension
now I'm claiming all my council pensions already
and then I have this I have these cash -free
lump sums to draw from as well Also, then I have
my private pension Now I could take this pot
of money and say buy and 11 -year annuity to
take me up to state retirement age. That doesn't
make any sense for me. It's not my best plan.
So what I'm going to do is when I live on my
council pensions and the tax -free lump sums
for the next six years, that will take me up
to 61. I'll leave my private pension pot invested
so it can continue to build. And then from the
age 60, 2 to 67 I will start to claim it now
this gives me six years more time for the pot
to grow obviously before I even touch it so as
you can see Jim and I are in very different positions
well while I would be really attracted to an
annuity in Jim's situation for me it doesn't
really make any sense I'm wondering did you or
are you about to choose an annuity and what's
the rationale behind that? I think it'd be really
interesting for others to hear.