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    • chiefie
    • By chiefie 19th Jun 17, 5:13 PM
    • 309Posts
    • 318Thanks
    chiefie
    Fixed term annuity
    • #1
    • 19th Jun 17, 5:13 PM
    Fixed term annuity 19th Jun 17 at 5:13 PM
    Hi all

    Wondered if anyone had any thoughts.

    Thinking about how to manage two db pensions so I can retire early at 55. Both have similar values at 65 and one of these together with sp is sufficient for me post 65. I may have to make a few years voluntary payments for ni or do some part time work to get the credits and supplement income (more as d miss the social side of work to start with I expect)

    So thinking of transferring one db to my existing sipp, taking TfLs and using the rest to cover 55-65. As I am generally risk averse for this short period, and don't want to risk a large loss in that ten year period I wondered if a ten year fixed term annuity would be suitable rather than investment and drawdown.

    Any thoughts/feedback ?

    Many thanks in advance
Page 1
  • jamesd
    • #2
    • 19th Jun 17, 5:48 PM
    • #2
    • 19th Jun 17, 5:48 PM
    An annuity would pay you back about as much as the purchase price. Not the greatest of buys. No harm in checking but current and savings accounts might pay you more.

    Have you considered P2P? Using places like Ablrate and MoneyThing it's unlikely that you'd do as badly as breaking even. I expect about ten percent interest a year after up to 2% bad debt allowance from their secured lending.
    • westv
    • By westv 19th Jun 17, 6:49 PM
    • 4,319 Posts
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    westv
    • #3
    • 19th Jun 17, 6:49 PM
    • #3
    • 19th Jun 17, 6:49 PM
    I don't know how companies have the audacity to sell these things.
    • dunstonh
    • By dunstonh 19th Jun 17, 6:57 PM
    • 89,852 Posts
    • 55,452 Thanks
    dunstonh
    • #4
    • 19th Jun 17, 6:57 PM
    • #4
    • 19th Jun 17, 6:57 PM
    I don't know how companies have the audacity to sell these things.
    Originally posted by westv
    They can still work in the right circumstances. They are effectively the niche option now though.
    • chiefie
    • By chiefie 19th Jun 17, 6:59 PM
    • 309 Posts
    • 318 Thanks
    chiefie
    • #5
    • 19th Jun 17, 6:59 PM
    • #5
    • 19th Jun 17, 6:59 PM
    An annuity would pay you back about as much as the purchase price. Not the greatest of buys. No harm in checking but current and savings accounts might pay you more.

    Have you considered P2P? Using places like Ablrate and MoneyThing it's unlikely that you'd do as badly as breaking even. I expect about ten percent interest a year after up to 2% bad debt allowance from their secured lending.
    Originally posted by jamesd
    I suppose my Worry with that is that I can not drawdown too mUch a year and I'm fearful of a market 'correction' that I can't recover from in time. I would take about 30k per year out over 10 years and I prefer certainty to the chance of growth
    • westv
    • By westv 19th Jun 17, 7:02 PM
    • 4,319 Posts
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    westv
    • #6
    • 19th Jun 17, 7:02 PM
    • #6
    • 19th Jun 17, 7:02 PM
    They can still work in the right circumstances. They are effectively the niche option now though.
    Originally posted by dunstonh
    I can't imagine what circumstances but you'll have more knowledge then me.
    • dunstonh
    • By dunstonh 19th Jun 17, 9:09 PM
    • 89,852 Posts
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    dunstonh
    • #7
    • 19th Jun 17, 9:09 PM
    • #7
    • 19th Jun 17, 9:09 PM
    I can't imagine what circumstances but you'll have more knowledge then me.
    Originally posted by westv
    Enhanced rates due to poor health can give a secure income for life, well above any so-called "safe drawdown rate". And do not forget that the pension freedom options also changed the legislation for annuities to allow greater choice on death benefits. So, you could have a return of the unused fund on death with an 7% enhanced rate. Or a 30-year income guarantee.

    You should not forget that every generation or two there is usually an event that sees a significant loss event occur. Those with low drawdown rates and those that can afford to turn off the income for a while as they have other sources can usually ride those events out. Those who are taking a high drawdown rate could find their pot shunted into a spiral of erosion that causes it to run out before death.

    You should not underestimate the ability of people to completely mismanage their money.
    • OldMusicGuy
    • By OldMusicGuy 20th Jun 17, 9:25 AM
    • 130 Posts
    • 212 Thanks
    OldMusicGuy
    • #8
    • 20th Jun 17, 9:25 AM
    • #8
    • 20th Jun 17, 9:25 AM
    As a very risk averse person, I can see the place of annuities in my retirement planning. Devoting some of my pot to provide either a term income or even a lifetime income with no risk is attractive. Sometimes chasing returns is not the goal. If you have "enough" and are in the decumulation phase, avoiding risk, especially pound cost ravaging, may be the goal.

    It's not so much that I would completely mismanage my money in retirement but more that I would like to avoid some of the pressure of having to manage all of my pot. Having said that, right now they don't look that attractive but I am watching rates to see what happens.

    Edit: I'll add that my attitude might be different if I had some DB pension to provide a base level of income prior to getting the state pension. But I don;t have any DB pensions, just a large DC pot and thus using some of that to provide a risk free base level of income is attractive. Although right now I am thinking more of a form of bond ladder rather than an annuity.
    Last edited by OldMusicGuy; 20-06-2017 at 2:10 PM.
  • jamesd
    • #9
    • 20th Jun 17, 3:40 PM
    • #9
    • 20th Jun 17, 3:40 PM
    I suppose my Worry with that is that I can not drawdown too mUch a year and I'm fearful of a market 'correction' that I can't recover from in time. I would take about 30k per year out over 10 years and I prefer certainty to the chance of growth
    Originally posted by chiefie
    That willingness to lose money by handing it over to an insurance company to be rid of the decision making is an area where term annuities can make sense for their buyer, poor though the deal is in pure financial terms. If there's money to burn, doing a bit of burning to simplify life just might not matter.

    Other options that don't involve a material risk to capital that you could consider include:

    1. Transferring to a SIPP that lets you pick which interest paying deposit accounts to use. Not likely to be great rates at the moment but still likely to beat the term annuity.

    2. Money market funds. At the moment you'd lose around 0.2% a year plus inflation on these but they might still beat te annuity. Longer term, with your ten year horizon, rates might rise to put you in profit, not just beating the annuity.

    With some risk, mostly from inflation:

    3. Gilts.
    4 Pound-denominated bonds from other governments that you consider reliable.

    Even with limits on what you take out you might be able to get out ten to twenty thousand extra a year and put that into some of the better current and savings account deals. Not going to be great but a decent chance overall that you'll beat the term annuity.
  • jamesd
    As a very risk averse person, I can see the place of annuities in my retirement planning. Devoting some of my pot to provide either a term income or even a lifetime income with no risk is attractive. Sometimes chasing returns is not the goal. If you have "enough" and are in the decumulation phase, avoiding risk, especially pound cost ravaging, may be the goal.
    Originally posted by OldMusicGuy
    Perhaps worth noting that over in Drawdown: safe withdrawal rates I mention:

    "Defer your state pension if you have normal life expectancy and no special case for not doing it. Up to five years has a good chance of breaking even, up to ten years can be good for longevity insurance (more here) and to increase the safe withdrawal amount from drawdown, by providing more of your minimum income requirement, see for example Blanchett's paper The Impact of Guaranteed Income and Dynamic Withdrawals on Safe Initial Withdrawal Rates."

    Blanchett's paper looks at the proportion of guaranteed income vs non-discretionary spending and finds that higher levels of guaranteed income increase the safe withdrawal rate. For US financial planners he says that the success rate normally used is too high and provides Table 5 that says what target success rates should be used for various combinations:



    Looking at the left side of that, the 50% / 50% box with 76% in it means that a person with mandatory spending at 50% of income with guaranteed income comparable to 50% of their wealth* should have a 76% success rate used if historical returns are being used and they aren't willing to accept much income variation. If they were willing to accept more variation they could cut that to 47%. So he observes:

    "An important takeaway from Table 5 is that targeting a very high probability of success (e.g., 95 percent) will not likely be optimal for most households. Although targeting a high probability of success creates a perception of safety, it appears that for most retirees it may lead to initial safe withdrawal rates that are too safe, especially for those households with high levels of existing guaranteed income. Therefore, although it may be difficult to explain why targeting 75 percent (or even 50 percent) is actually quite safe (versus 95 percent), not doing so will likely result in below-optimal consumption during retirement."

    * he explains that just below table 3, it's effectively amount of guaranteed income times the cost of buying that income. So if you have £8k of state pension and triple lock annuities could be bought for 3% of the amount spent that £8k would be worth 8000 / 0.03 = £267,000.
    Last edited by jamesd; 21-06-2017 at 6:59 PM.
    • OldMusicGuy
    • By OldMusicGuy 21st Jun 17, 9:08 AM
    • 130 Posts
    • 212 Thanks
    OldMusicGuy
    Thanks James. I have that thread as a favourite and you have reminded me to go and work through it in some depth as I do my retirement planning.
    • westv
    • By westv 21st Jun 17, 9:25 AM
    • 4,319 Posts
    • 1,883 Thanks
    westv
    Do those figures assume 100% of guaranteed income from the start of retirement or do they also take account of a phased increase?
    Also, is this something cfiresim allows for this in its calculations?
  • jamesd
    Those assumed that the guaranteed income was available from the start. The most important part is that it must start before the failure which causes it to be relied on. Even retiring at 55 it's unlikely that there will be a failure before state pension age is reached.

    Cfiresim always includes guaranteed income in its calculations if you tell it about that income. It's very important to include state or work DB income if you're retiring before they start. If you don't do that the calculations will result in income levels that are far too low for the years before they start.

    You can also add in things like spending capital to buy annuity income at whatever ages you like and that decreased capital and increased guaranteed income will be part of the calculation. If you're going to defer your state pension just have it start later at the higher level.

    If you choose to use the Guyton-Klinger approach, that will normally cut income faster than the five percent a year that Blanchett used, reducing the chance of bigger cuts later.

    I have some examples of the effect of changing the success rate requirement and guaranteed income need on the initial income here. A quick summary for that specific case:

    75%: £24,420.
    90%: £20,656 with minimum set to £16,500 as for the rest. Increases to £26,918 if you cut the minimum to £12,000.
    95%: £17,909.
    100%: £10,554.

    The things that produce bad outcomes are known. Biggest is sustained low returns, next is big drop just after retiring, if we ignore war. If you're living through low returns you'll know it and can choose to cut income e more, as Kitces suggests in one of his articles. And you can protect against the big drop using Guyton's sequence of returns risk reduction method, or by using a rising equity glide path. Models are nice but you're allowed to adjust based on what you actually experience for your particular retirement point.
    Last edited by jamesd; 21-06-2017 at 7:36 PM.
    • bostonerimus
    • By bostonerimus 21st Jun 17, 7:44 PM
    • 966 Posts
    • 494 Thanks
    bostonerimus
    An important takeaway from Table 5 is that targeting a very high probability of success (e.g., 95 percent) will not likely be optimal for most households. Although targeting a high probability of success creates a perception of safety, it appears that for most retirees it may lead to initial safe withdrawal rates that are too safe, especially for those households with high levels of existing guaranteed income. Therefore, although it may be difficult to explain why targeting 75 percent (or even 50 percent) is actually quite safe (versus 95 percent), not doing so will likely result in below-optimal consumption during retirement.[/I]"
    by jamesd;72724454
    "[I
    In this context optimal income maximizes withdrawals and depletes the pension pot to zero on the day you die. Whether that is your personal optimum depends on your circumstances and lifestyle. If you want to leave an inheritance it's definitely not the optimum withdrawal rate. The reduction in withdrawal rate when market returns are projected using current market trends rather than historical returns is also worth noting.
    Misanthrope in search of similar for mutual loathing
  • jamesd
    Optimal income if you live through unusually bad times would try to leave nothing. Blanchett didn't increase income for good times so the more likely result is very substantial inheritance in the non-bad cases. If someone does want to give higher priority to inheritance than their bad case income they can set up a desired ending wealth level. I expect that if those bad cases were the case that happened their children, if the planned beneficiaries, would be telling them not to do that.

    The current conditions reduction is based on current equity and bond values and the implied future returns at those prices. It's fairly easy to avoid that effect here, given that P2P paying raw 12% is readily available, perhaps 10% after bad debt in that secured lending. The historic return used was 12% for equities and 5.5% for bonds with 3% inflation. You have a good probability of beating the historic returns here if you do P2P as a substitute. My IRR is over 19% for the place I use most if I assume all bad debt is total loss, about 1% higher for total recovery.

    It is interesting to notice that with those implied future returns the safe withdrawal rate is 4.1% with 70% equities, 50% of wealth from guaranteed income and 50% non-discretionary spending with moderate income stability preference, from table 4. But that is with a willingness to vary income, not staying with it constantly during bad times. For background, that 50-50 assumption here would be a household with two state pensions of £8,000 each and £534,000 of investments, assuming the state pension can be purchased at 3% income level. That much capital is moderately uncommon and the guaranteed income is likely to be more like 75% with 5.2% safe withdrawal rate. Still lower than the 6.5% for the historic case but pretty good for anyone who was inclined to use the 4% rule.
    Last edited by jamesd; 21-06-2017 at 9:02 PM.
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