Pension- lump sum vs annuity

[afrikat]

I have a defined contribution pension and according to the calculator at my current contributions I could either take a lump sum of £180k and an annual amount of £24k or a v small lump sum of £5k and an annual amount of £37k. What would you do and why? Retirement at 65. I'm currently 42.

Are you entitled to state pension? Is there anyone else in your household with pensions?
I ask because household income is important too. Will you own a home outright by the time you retire?
With those amounts I'd take a bigger lump sum, but that's because DH will also have a pension coming in so income for two retired adults with no mortgage of 70-80k seems more than fine, plus the lump to invest/use as I see fit plus DHs lump sum. Renting and single income household my decision might not be the same

Yes I'll be entitled to state pension and I am married. My husbands pension won't be as high as mine but should still be decent. Mortgage should be paid off by then

That will be based on a basic, single life annuity that will die with you.

Future projections are also notoriously unreliable, what is the projected growth rate? How is it invested?
Annuity rates could fantastic or they could be terrible by then.
If you wanted a joint life or guaranteed for 10 years annuity it would be more expensive, so income would be lower.
If you want to leave your pension as an inheritance or use it for potential care fees in old age, drawdown is better.
You could also do half and half, use half for guaranteed income with annuity, leave the other half invested for flexibility, just drawing the natiral yield from income funds.
That’s what I’d do with such a big pot.
Your potential pot will be £700k ( if the tfls is £180k)
which is a lovely place to be.
It’s normally better to buy an annuity at age 75+, far better rates.
You’ve got 15 years before you need to decide.

It’s best to arrange your investments according to your plans starting 10 years before retiring.
You don’t have to take 25% tfls upfront, you could just take 10% or UFPLS can be more tax effective, especially if you retire a few years before State pension kicks in.

Thanks BorgQueen I don't know the projections or how it's invested, I need to do some digging. Alot to think about, thanks for answering

It’s my obsession atm, DH wants to retire at 64, in 7 years time so I’ve been knee deep in research for the last couple of years 🤣 Annuities will be for old age as he will have a military pension with guaranteed income from 2025. Our Sipps are split into medium and long term investments.

@afrikat would I be right to guess that you do not have to decide right now? If that is right then I strongly suspect those figures are hypothetical, based on current market conditions, and could be very different from what is on offer when you reach retirement age. In which case, spending a lot of energy working out what would be the hypothetical best choice if you were hypothetically 65 today is not that useful.

More useful today would be to work out whether either of those would provide enough capital and income in retirement to complement what you would be getting from elsewhere, and if not, how can you save and invest more right now and in the coming years?

Personally I would never buy an annuity, especially if I had that much in a pot, as I’d more than likely kick the bucket aged 70 or something. I’d use flexi-drawdown.

Personally I'd take the lump sum.
I'd rather spank that lump sum cash doing amazing stuff as £24k a year will be more than enough once i am 75+ and all i want to do is pootle round the garden and hang out at waitrose for discounted snacks the hour before closing...

Look at the PLSA Retirement Living Standards. It lets you know on 3 different levels of income, what sort of lifestyle you can expect in retirement.

Agree. I would also never buy an annuity. Is flexible drawdown an option?

Neither.
I'd do flexible drawdown instead of buying an annuity, so that invested funds can still grow.
How much i would take as a lump sum upfront would depend what I needed at that time. If I still had a mortgage I'd pay that off for example.
With flexible drawdown you can take lump sums tax free (like the upfront lump sum) but don't have to take it all at the start.

Also with drawdown you can leave any remainder to kids or husband or whoever you like. With an annuity it tends to die with you (you can choose options where spouse gets some after your death, but it will result in a lower amount per year)

I don't understand the difference between drawdown and annuity so will do some research! Thanks all

From a living life to the full point of view take the lump sum and spend it doing the things you e want to do. My partner died his year at 66 he had a huge pension from nhs/bupa and had only just got his state pension. I'll be forever grateful that he'd taken his lump sum and spent it doing a fabulous round the world trip and met all the friends he'd made over the years working hard just when we'd met 5 years ago as the rest of his pension went up in smoke when he died as we weren't married. The best part of 1/2 a million quid disappeared without even a nominal payment for his kids.

@afrikat it does sound like you need to do some research and understand the basics before making any decisions and you've got plenty of time before you need to make those decisions so plenty of time for research.

In simple terms an annuity means you get a set amount each year but the rates have been poor in recent years eg £30k = £1k per annum payout (but remember that this can be for life so if you retired at 60 and lived to 100 you'd get £1k per annum for 40 years so your £30k would get you £40k but £1k per annum is tiny and wouldn't even pay your bills). Annuity rates have improved recently.

Drawdown is where you draw money out of your pot as and when so the chunk left in continues to grow. 4% is often quoted. Drawdown means you can take out more if you need it and less if you can live by other means. But you also run the risk of running out of money if not managed carefully.

You can do a combination of the two. At 42 it's good to plan but as a PP said the rates for both will be very different by the time you retire so don't tie yourself in knots trying to work out the best option at todays rates.

Thanks for the explanation Misty that's really helpful

Annuities bought after age 75 are hard to beat for guaranteed income and there is no managing your investments needed.
It’s not a case of one or the other, you can have a hybrid.
I’d always try to keep a spare £100k in a drawdown arrangement in case I needed care in later life, you can buy care annuities that are tax free when going straight from pension to care provider, far better than paying 20/40% tax given that you would have to withdraw huge yearly sums and your State pension would take up most of your personal allowance.
At age 75 and in moderate health, you would expect £7kish a year at least from £100k