The big R cometh

TMFTP

Not quite. It's true that gilts form a part of annuity investment strategy, but they are low yielding. Companies will use a mix of investments (corporate bonds, property, currency) and then give an appropriate return based on that balance.

The effect of Solvency2 will be to force companies to price against "risk-free" investments (like Gilts, and low yielding) - hence the anticipated drop in consumer rate.

The "unfairness" part of this (very simplistically) is they are treating annuitants like investors into a fund. If all investors want their money back at the same time, the company must prove they are able to pay up. Whereas annuitants currently cannot withdraw their pot of cash - so the companies should (discuss!) be allowed to make longer term, higher yielding investments as a result.

zygurat789

TMFTP wrote: »

The "unfairness" part of this (very simplistically) is they are treating annuitants like investors into a fund. If all investors want their money back at the same time, the company must prove they are able to pay up. Whereas annuitants currently cannot withdraw their pot of cash - so the companies should (discuss!) be allowed to make longer term, higher yielding investments as a result.

Once I had bought my annuity I wasn't aware that I had a pot of cash anymore, is this going to change? I thought this was all about liabilities and potential liabilities which in a standard annuity is only the annual payout to the annuitant. Granted if all the investments went belly up then there would be a problem but if this happened there wouldn't be an EU anyway.
This seems to be very important to people thinkuing of buying an annuity, the majority of those retiring with a pension pot, Why has it not been discussed more on these pages instead of just dismissing annuities entirely?

TMFTP

You're correct that currently there is no pot left when you annuitise. Solvency 2 is of interest to the industry as it will drive innovation.

If we accept annuities are a "good" product, then we need some way to give a better rate than you'd get from a bank account (or there's no point in saving into a pension). One way to do that would be a "capital return guarantee" - which the industry cannot offer now due to legislation.

Or, annuities will "die" - the Tories say they plan to scrap forced annuitisation, in which case you have the option to retain your own pot and all of the investment / mortality risk. If you run out of money before you die - tough, and if you live long, invest wisely and pass on huge sums to beneficiaries - great.

There is lobbying going on to request legislation changes to allow return of capital to annuitants on death - but how long to get understanding from ministers, let alone agreement, papers drafted and through parliament.... Possibly not in my lifetime.

But in the interests of perceived "fairness" I think it would go a LONG way to ensuring consumer confidence in the industry.

jamesd

zygurat789, £200,000 minimum for drawdown is a surprisingly high number to be using, representing an income of some £12,000 a year even with no income from the state pensions. Adding in state pensions it's around 50% more than the non-retired spending I'm happily living with. It's the sort of value I might expect to see from a company that only sells annuities and wants to discourage all potential customers from considering drawdown. Without knowing Martin's reasoning we can't know why he chose such a high figure.

Making sure that state pensions, annuities and work pensions combined are sufficient to pay all core living expenses is very cautious retirement planning that's unlikely to fail to provide a suitable income long term. Anything above that might sensibly be done with drawdown without excessive risk. For that reason it's the route that anyone who's not comfortable and experienced with investing should choose unless they are going to use professional management.

A calculation like this would be a good deal better than a single figure but we do need to remember that Martin is writing for a general audience without much ability to customise his guidance for individual circumstance. And I haven't read the guide yet so I don't know what context that figure was placed in.

For most retirees today their personal pension pots are only a small portion of their total income and they might be choosing what to do with only £20,000-£40,000 based on typical annuity purchase sizes. That's potentially £1,200 to £2,400 on top of state pensions that could be around £7,000 and work pensions that many will be receiving. For such retirees even the £20,000 level could be fine for those who are comfortable using drawdown, since it's a relatively small portion of their total income.

Even so, today it's still the case that most people will not have the interest or knowledge to manage drawdown and should either pay a professional to manage drawdown or use annuities and the state pensions for core income needs.

That is likely to change over time as defined benefit work schemes have largely been replaced by investment-based money purchase schemes, so we'll see increasingly high percentage of retirees who are happy to continue to manage their investments at least through the early years of retirement. Many who are in their early to mid fifties or younger now won't even think of considering annuities until their seventies or older just because they are used to managing investments and happy to continue doing it for a while. These retirees will also be likely to have pension pots beyond that £200,000 figure because they will have that pot instead of a workplace defined benefit pension.

If Solvency 2 does greatly reduce payouts for annuities that will also greatly shift the balance in favour of drawdown and is likely to cause a large increase in retirees choosing drawdown with a cautious investment mixture (corporate bonds, commercial property, cash, equity income).

Regardless of what happens with Solvency 2 it's almost inconceivable that I'd want to use annuities as part of my own early retirement planning. I'd just include a range of cautious investments within a drawdown arrangement sufficient to cover my minimum needs. But I'm firmly in the group of retirees with no workplace defined benefit pensions to rely on, just investment-backed pension planning and the state pensions, so it's no surprise that I'd for myself have the view that can be expected of many with the same background.

Income drawdown is technically called "unsecured pension" before age 75 and "alternatively secured pension" after that. The investments don't change, just the name, even though it magically changes from unsecured to alternatively secured.

dunstonh

Income drawdown is technically called "unsecured pension" before age 75 and "alternatively secured pension" after that. The investments don't change, just the name, even though it magically changes from unsecured to alternatively secured.

And it become know as that after April 2006. For decades it was known as income drawdown and is still referred to that frequently. Just as the 25% lump sum is no longer called tax free cash but Pension Commencement Lump Sum. However, most still call it tax free cash.