I have recently taken early retirement. I have 2 pensions. The lesser AVC of approx. £30,000 I decided to invest in a With Profits Annuity (TAVC England and Wales) WP but I am unsure whether this is wise in the financial climate at the moment. I still have a few days to cancel. What do you think? 

This is a really interesting question although I’m not sure that I can give you a yes/no answer.

The first point I would make is that you say you have two annuities and have decided to do something different with each of them. If that is to hedge your bets (when you are buying an annuity you are making all sorts of assumptions on life expectancy, future annuity rates, investments returns etc) then that might seem like a sensible strategy. However, if it wasn’t to hedge your bets, is there any sense in taking two different types of annuity when, by default, only one can be 100% appropriate for you?

My second point is regarding With Profits. With-profit funds are a type of investment that shares out the profits and losses of the fund to its investors. Your money is invested in a range of assets such as equities, bonds and property, which have the potential for growth over the longer term. With-profit funds are designed to provide a smoothed investment return rather than the volatility of direct investment in the stock market. This is achieved through regular bonus declarations. The theory goes that in good investment years not all of the investment return is distributed, with the balance being placed on reserve. These reserves can then be used to distribute more than the investment return in years of poorer performance and, as a result, create a more consistent, smoothed overall return.

With Profits funds have received a lot of bad press over recent years as there is no hard and fast rule about what element of gains should be retained and what should be distributed. It is also difficult to see exactly how the fund is invested (i.e. the split between equities, bonds, property and cash for example).

I am not a big fan of with profits related investments for the reasons listed above but that doesn’t mean to say that it is  the wrong choice for you.

My third point is about what I would call “market timing”. If a with profits annuity was right for you say 1 month ago when you might have been making that decision it should still be the right long-term decision. I would urge people to try to make decisions based on a rational long term view and not on short-termism. Markets will go up and down. Recessions will come and go. Timing when they will happen is impossible and if you can accept this, it makes it much easier to make sensible financial planning decisions.

The problem with annuity purchase is that there are so many variables. It is impossible to give you a definitive answer based on the limited information provided but of all of the financial decisions that individuals have to make, I would say that annuity purchase / retirement decision making is one of the most difficult and most critical decisions. I would therefore recommend that anyone at this turning point in their lives should seek independent financial advice. The www.unbiased.co.uk website is a great place to start. 

About our Resident Financial Expert

Jason Witcombe APFS, CFPCM is a Chartered Financial Planner at Evolve Financial Planning. He has been awarded prestigious Chartered Financial Planner status, a qualification that only around 900 of the UK’s 65,000 qualified advisers have attained. He is also a Certified Financial Planner and is an Associate of the Personal Finance Society.

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