MSE News: New pension freedom means it pays to know when you'll die

Interesting contradiction in there: apparently a 5.5% annuity is 'crap' but in order to keep enough money for live you should draw "4 or 5% per year"

Although I have read again and he points that out, so that'll teach me.

JimmyTheWig wrote: »

Why are rates so bad? Is there a gap in the market for a provider to come in and trump what everyone else is paying?

Presumably there is no point in taking the lump sum if you decide to pay yourself less than the annuity would have paid you?

Depends if you want to leave any of the cash to beneficiaries.

Buy an annuity and your capital is gone, buy a pension 'pot' and pay yourself from it means, ideally, there will be something left to pass on when you die.

Of course, it could all go horribly wrong and you could end up with nothing in the pot and no income if you spend it all too quickly

Here's an article about some of the strategies that you could use to manage income

http://howlongwillmyfundlast.co.uk/income.html

Buy an annuity and your capital is gone, buy a pension 'pot' and pay yourself from it means, ideally, there will be something left to pass on when you die.

Buying an annuity does not mean the cash is gone. The media coverage of this subject has been very poor in this respect. Focusing on "annuity is crap" and "drawdown is better".

The rules were also changed as part of this process for annuities. They are no longer restricted with the 0 year, 5 year, 10 year guarantee. They will be able to offer options like "value protect" which return capital on death.

If you're interested in me reviewing those planned articles I'll be happy to do it as someone outside the team.

This is inaccurate: "the typical life span for a man who hits 65 in the UK is another 18 years, a woman 21". The correct figures using the latest 2010-based ONS UK cohort life expectancy data for a 65 year old man in 2015 is 21.7 years and for a woman 24.3 years. You avoided the most major mistake of using life expectancy at birth but it looks as though you used period life expectancy when cohort life expectancy is the one to use for this purpose, as ONS explains.

Thanks for being even more explicit than I am and writing that "The problem with annuities isn't how they work – it's that the rates are crap". But there's a great alternative: deferring the state pension. This pays 10.4% per year of deferral for those who reach or reached state pension age before the flat rate/single tier starts in 2016, increasing with CPI inflation and mostly inheritable by a spouse. After that it is 5.8% not inheritable, increasing with CPI. Both of these rates are way better than standard annuities and also better than most enhanced annuities. The annuities offer such poor value by comparison that I think it should be an automatic mis-sale to sell one to a person near state pension age without telling them how much they could get doing this instead of buying the annuity.

The 5.8% rate is good value compared to the historic average investment returns of the UK stock market, which have been about 5% plus inflation. The value of deferring gradually decreases as the number of years deferred increases but in general for those of good health it will pay to set aside five years of state pension income to allow deferring for five years instead of spending that money on an annuity. The main catch is the same one that annuities have: you're spending the money so it's not available for inheritance of contingencies later in life. But it's still a great deal for secure income.

There are guidelines about how much income can be taken safely. It was derived from US data but one common value is 4% increasing with inflation.

Assorted rules have been derived that either increase the amount of income that can be taken with a 90% or so chance of not having to reduce income later or increase the chance above 90%. The key rules are the Guyton or Guyton and Klinger safeguards that would allow a 6.5% withdrawing rate with nearly 90% success rate when used in combination with their work. The two additional safety rules are:

1. "there is no increase in withdrawals following a year in which the portfolio’s total investment return is negative, and there is no make-up for a missed increase in any subsequent year"
2. "the maximum inflationary increase in any given year is 6 percent, and there is no make-up for a capped inflation adjustment in any subsequent year"

Both of those rules implement income cuts in adverse investment return circumstances.

A further rule is to have one year of planned investment income in savings so that it is not necessary to sell during a market downturn, like the other rules this has been shown to increase success rate or acceptable income level.

Much more controversial would be the use of equity release mortgages that allow borrowing and paying back to increase success rate or income levels. As with the others, this reduces the need to sell but during even more prolonged downturns, while adding the option of near to end of life withdrawing without the intention to repay.

It's also good to have some understanding of sequence risk, to know that the peak risk is a downturn in investments that starts just after retiring and doesn't recover for a long time, a replay of the Great Depression. A person who has reached five years after retiring without experiencing that can be much more confident that they can safely take income at the upper bounds or even higher.

Very little coverage of what research has shown can improve drawdown success has been done in the mainstream media. If MSE can do a good education job in this area you can make a very substantial difference to retirement prospects. Please do.