The big R cometh

TMFTP

James - your "20%" reduction is in benefits - therefore would be equivalent to c."2%" in discount rates (the way I expressed them).

So my 1%-4% reduction equates to a 10%-40% cut in your terms...your 20% is less a "scare story" and more a conservative / realistic / hopeful estimate - depending on how effective you think the lobbyists (Myners) will be.

Aniticipating a rise in interest rates (as Zygurat appears to be) would be a bit rash in my opinion. This is on the industry radar, and providers will begin pricing to it sooner rather than later. Or, as dunston mentioned Axa have done, pull out of the (enhanced only?) market altogether.

jamesd

TMFTP, ah, understand what you meant now. Yes, a cut of 4% in the percentage of capital paid as income would be tough.

Proxy

dunstonh wrote: »

AXA announced a few weeks back that they are pulling out of the annuity market because of Solvency II. It is going to have a significant impact.

AXA announced they were pulling out of their 'pilot' on *Enhanced* Annuities because of S2.

They've mentioned nothing about standard annuities and the whole thing got more coverage than it should have done, seeing as AXA almost certainly wrote nil to none in the enhanced annuity market and decided using S2 as an excuse would be a nice bit of spin.

S2 will have an impact on the market but even at this stage (before it gets watered down further along the process) some of the scarier aspects are unlikely.

zygurat789

Oh so no good news then.
All this on Solvency 2 is staggerring and something I'd never heard of and alll so totally relevant.
I originally started this thread because after weeks of looking I hadn't seen much on annuities and as has been said previously they account for the majority of pension pot investments. I know you all like what you call drawdown but I never wanted a comparison discussion, for which there is a separate thread, however, I received Martins booklet ther other day, it says they are more properly called unsecured pensions, are relatively high risk and not reccommended for funds of less than £200,000 and they are good for those who have other cash available to live on and don't need the income from an annuity. I understand this to say that an unsecured pension falls outside the scope of most people who are retiring, and therefore, a discussion on annuities has added importance.
It would appear that Solvency 2 will start in 2011, does this mean that rates will (if they are going to) drop then or will there be a gradual fall towards the operative date?

dunstonh

I know you all like what you call drawdown but I never wanted a comparison discussion, for which there is a separate thread, however, I received Martins booklet ther other day, it says they are more properly called unsecured pensions, are relatively high risk and not reccommended for funds of less than £200,000 and they are good for those who have other cash available to live on and don't need the income from an annuity.

Remember that Martin has no financial qualifications or knowledge.

The risk of drawdown is not perhaps as great as it used to be but it is riskier than annuity purchase. The overall risk though depends on the investments you use within the drawdown. I have never heard any reference to £200k anywhere. The figure often quoted is £100k as that is the figure the FSA used.

Also, the reference to those not needing the income from an annuity is daft. If you dont need an income you wouldnt put a plan into drawdown (unless its part of a phased drawdown).

TMFTP

You're seeing the effects already. Rates are down in 2009 compared to 2008 (depending on each provider's view on what effects are likely to be).

Axa, as stated, has withdrawn from the enhanced market quoting Solvency 2 requirements - though, to be fair, it was never what you would have called a "serious player", and using Solvency 2 MAY have been a face-saver.

But in the next year or so (until the European legislation driving Solvency 2 is finalised) I can't see UK annuity providers doing anything other than holding on to increasing amounts of capital they were previously passing on to the customer.

When we get past the point of final legislation, it will be interesting. If you have a provider assuming "20% cut" and it turns out to be 10% - will they pass on capital they're currently holding back? Even if they do, will it make them competitive? Do we currently have any companies who have not yet made any allowance for Solvency 2? If so, should you grab their rates now (assuming you can)?

The problem is lack of general education about retirement. Too many people don't understand the difference between "pension" and "annuity" - and if they don't follow that, they have no chance of making the right choice when it comes to future legislation - unless they have a GOOD adviser.

zygurat789

TMFTP wrote: »

Aniticipating a rise in interest rates (as Zygurat appears to be) would be a bit rash in my opinion. This is on the industry radar, and providers will begin pricing to it sooner rather than later. Or, as dunston mentioned Axa have done, pull out of the (enhanced only?) market altogether.

Didn't thwey raise one of their key rates by 50% over the weekend. Is this an indication of things to come?

TMFTP

Perhaps - but they haven't touched their annuity rate.

Annuities are typically priced over a long (20+ year) period. Any provider raising it's rate is committing itself to being able to match that rate in investments over that ENTIRE period in time.

It may be that they have made a good, profitable short-term investment, and are passing that on in a product which doesn't have such a long commitment period.

As well as "annuity versus drawdown" you will also see "pension versus ISA" debates here. If you invest in an ISA you lose a bit of tax relief but gain the flexibility to be able to take advantage of any short-term deals (like this one may be).

zygurat789

dunstonh wrote: »

Remember that Martin has no financial qualifications or knowledge.

The risk of drawdown is not perhaps as great as it used to be but it is riskier than annuity purchase. The overall risk though depends on the investments you use within the drawdown. I have never heard any reference to £200k anywhere. The figure often quoted is £100k as that is the figure the FSA used.

Also, the reference to those not needing the income from an annuity is daft. If you dont need an income you wouldnt put a plan into drawdown (unless its part of a phased drawdown).

I have financial qualifications, thet just aren't in this area and I credit Martin with common sense and clarity of thought.
I am content to use your figure of £100,000 I don't think it will make any difference to my conclusion.
I think the operative word is "need" these unsecured pensions are for the wealthier retirees.

zygurat789

TMFTP wrote: »

When we get past the point of final legislation, it will be interesting. If you have a provider assuming "20% cut" and it turns out to be 10% - will they pass on capital they're currently holding back? Even if they do, will it make them competitive? Do we currently have any companies who have not yet made any allowance for Solvency 2? If so, should you grab their rates now (assuming you can)?
Presumeably this will be apparent in the quotes?

The problem is lack of general education about retirement. Too many people don't understand the difference between "pension" and "annuity" - and if they don't follow that, they have no chance of making the right choice when it comes to future legislation - unless they have a GOOD adviser.

I always thought that the annuities market was akin to long term interesr rates which always lag behind current rates. I thought the insurance co. took the pension pot and bought gilts, paid a little bit more than the gilt interest to the annuitant ans sat back to await the inevitable when it could pocket the gilts. No?