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  1. #1

    End of 'Fixed Term Annuity'

    I reached retifement age (65) in May 2013, and was persuaded by an intermediary to purchase a 5 year 'Fixed Term Annuity'.

    After taking my 25% tax free lump sum and the intermediary pocketing his fee of approx 2,500 I was left with a pot of 97,500 which has been paying me a yearly annuity of 5,038 gross (4,400) after tax. With the benefit of hindsight I now realise that what I entered into was similiar to drawdown but without the ability to choose my own investments. At the end of the term (May 2018) I will have a guaranteed maturity amount of 75,756.

    I do not want to take out another fixed term annuity next year, and my question is can I simply transfer to another drawdown provider and make my own investment decisions?

    My wife and I will have a combined income of approx. 28000 p.a. made up of state pensions and equity ISA,s. which is sufficient for our needs, so the requirement to drawdown will not be excessive.

    I have been thinking about investing the guaranteed maturity amount in Investment Trusts rather than Unit Trusts & OEIC,s which I have used to build my ISA portfolio so far, in the hope of keeping costs down.

    I would appreciate any ideas that would give a mixture of income & growth, with fairly low maintenance.As I have no experience of Investment Trusts, although I am researching the financial web sites, I would still like some guidance from more experienced forum members.

  2. #2
    Most people think that annuities are a rip-off, and most people think that financial intermediaries are a rip-off too. It looks like most people are right.

    You started with 97500, and got five lots of 5038, and ended up with 75756. I suppose you got a guarantee for this, and the lack of any growth in the money was taken up by the guarantee. They had a balance sliding from 97500 to 75756 over a 5 year period, and all it required to grow by in that period was (75756 + 5*5038 - 97500) = 3446. It would require only a very low growth rate to achieve this.

    Alternatively, if you had invested in a portfolio of high-yield-bond-funds, renewable energy shares, infrastructure shares, and diverse income funds, you could have got a natural yield of 5.2% (yielding 5038pa of natural income). What the capital value would have been at the end of a 5 year period is open to speculation - there wouldn't have been any guarantees. Most people would expect to still have the 97500...

    When pension rules changed and people were no longer forced to buy annuities, annuity sales fell through the floor. Take this as a signal of what not to do. But what to do now?

    My suggestion is that you invest in a portfolio of high-yield-bond-funds, renewable energy shares, infrastructure shares, and diverse income funds. I don't know what else you own (therefore I cannot give real "advice"), but I would say spread the 97500 across 10 holdings (diversify across asset classes and providers). That is about 10k per holding. High-yield-bond-funds (4), renewable energy shares (2 one solar one wind), infrastructure shares (2), and diverse income funds (2). They should be OK for long term buy-and-hold.

    If you own equities directly in your ISA, you might want to look at what happened to Carillion and Provident. Equity ETFs are low cost (for example ISF). IUKD offers a good dividend income. And any collective investment vehicle will protect you from random precipitous falls in individual companies.

    Good Luck and best wishes.

  3. #3
    Wow! They gave you 5% of your own money back in five chunks and you paid them for this privilege?

  4. #4
    What William entered into was a practically risk-free arrangement that, after taking into account the fees involved, produced practically no gain. No risk, no gain, as they say.

    By using a drawdown product, he could have generated an annual income of a similar amount to the annuity, but the residual capital value after 5 years would be unknown. Over the last 5 years it would probably have grown, but who knows what could happen over the next 5 years (or months, or days, for that matter).

    If knowing the residual value is going to be important then drawdown may not be the best thing. But it's not an all-or-nothing situation as you can mix and match annuities and drawdown to give a combination that suits your circumstances and your risk appetite.

    One further option for the risk averse is to open a SIPP with a provider that will let you invest your cash directly with banks. Many of the mainstream SIPP providers invest it for you and then pocket most of the interest to boost their profits, but by going direct with "sippable" FSCS-protected deposit accounts you can earn over 2% on your cash with zero risk. If you don't mind a very small risk then you could even consider Sharia-compliant sippable accounts which pay profit rather than interest and are often giving the top rates.

    EDIT: A late edit to point out that I'm just talking about capital risk here, not inflation risk. On the assumption that interest rates rise when inflation rises (which admittedly is yet to be properly tested in this post-financial crisis world), to mitigate inflation risk you could "ladder" the deposit accounts. So for example, you could split the cash into three parts and put one part in a one year fixed account, one part in a two year fixed account and the final part in a three year fixed account. Then, when the one and two year accounts mature, transfer the cash into three year accounts. That way you have a set of rolling accounts that will respond to gradual changes in interest rates.

  5. #5
    Thank you for your input Steeve139 & PaulSh. However,Joe Soap, the words "salt" & "wound" come to mind. Not particularly welcome!


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