She can't decide between keeping it invested and drawing an income, or buying an annuity. Access or stability? That is the choice she is faced with. So she goes for a bit of both.
She figures that her investing in index-linked gilts is not that much different from buying an annuity. So if 75% of her SIPP was going to be in bonds, why not just buy an annuity anyway? Sure she says goodbye to the money, but it will give her that certainty she is looking for.
So Anna takes her 25% tax free cash - and pays £100 000 for an annuity. But she is not done yet. She is still earning and saving (and has £33,333 in cash in the bank). So she starts another SIPP and starts paying into that. And, thanks to her regular annuity income, she thinks: 'maybe I am not such a cautious investor any more'.
The moral of this story is that once you reach pensionable age (55) you have the option of swopping the 'bonds' side of your portfolio for an annuity.
Remember a 'pure' annuity actually returns all your money to you over your expected lifetime, meanwhile investing it in gilts. Hence the low-return on your 'investment'. ( A real world annuity does much the same, except it keeps back 10-15% for profits/expenses and holds corporate bonds too).
So annuities have two big drawbacks:
- you lose money if you die early
- your savings are invested at low yields (gilts), possibly for decades
but if your savings were invested in gilts anyway, one of the drawbacks is eliminated.
Anna takes one more decision - she decides to go for the maximum, flat rate annuity. (£475 a month, versus £260 for RPI linked).This 'front loads' her payments from the insurance company and it will help her save still more into her SIPP. And with that income secured she feels she can be a bit more adventurous in her new portfolio.
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