Saving for your retirement - a new approach

Paul_Herring

mbarge wrote: »

CMI Reports from the Institute of Actuaries.

http://www.actuaries.org.uk/__data/assets/pdf_file/0007/154861/Time_series_modelling_of_Gompertz-Makeham.pdf Figures 2.1 (pp 19 history) and 5.6 (pp 156 projected) for anyone who can be bothered to translate them.

I'm still unconvinced about a 30% 'increase'.

mbarge

Paul_Herring wrote: »

I'm still unconvinced about a 30% 'increase'.

I'm not trying to convince you of anything.

I see it as a risk - that's all - and now, finally, insurance companies have provided a means of mitigating that risk. I'm trying to figure out if its an acceptable price to pay.

If they're right about the 20%-30% then I can think of worse places to put my pension fund.

mbarge

Paul_Herring wrote: »

I'm still unconvinced about a 30% 'increase'.

There are other issues which may soon affect annuity rates... Solvency II.

In 2012 insurance companies will be subject to new rules on reserving for annuities. These are likely to make it more expensive to write annuity business (they will need to put up more capital). This will probably have a detrimental effect on annuity prices although in fairness many of them may already be allowing for the effects.

sandsy

Paul_Herring wrote: »

http://www.actuaries.org.uk/__data/assets/pdf_file/0007/154861/Time_series_modelling_of_Gompertz-Makeham.pdf Figures 2.1 (pp 19 history) and 5.6 (pp 156 projected) for anyone who can be bothered to translate them.

I'm still unconvinced about a 30% 'increase'.

That paper isn't authorised by the CMI of the Institute of Actuaries. It was written as a dissertation as part of the qualification process:

http://www.the-actuary.org.uk/867926

And this is probably a coincidence:

Intersolve actuary Mark Barge, who originally helped design precipice bonds ....

from

http://www.moneymarketing.co.uk/analysis/precipice-precedents/136032.article

mbarge

sandsy wrote: »

And this is probably a coincidence:

Probably....:)

There are more reasons to believe that a deferred annuity (if fairly priced) might offer better value than waiting to buy an immediate annuity..

The first is mortality anti-selection.
The immediate annuity market is effectively divided in two, there's standard annuities and there's enhanced annuities. Enhanced annuities, for impaired lives, account for around 35% of the market. Everyone else (healthy people) are subject to standard annuity rates. Because the impaired lives are effectively removed, standard annuities are even more expensive.

Deferred annuities (10-20 years deferred) are not divided in that way (there is no enhanced deferred annuity market) so the mortality experience is expected to be heavier - hence better annuity rates.

The second is the shape of the yield curve
Longer duration deferred annuities benefit over immediate annuities from an upward sloping yield curve. The yield on 10-15 year Gilts is around 3.5% whereas longer term Gilts used to price deferred annuities are yielding over 4%.

sandsy

mbarge wrote: »

This is complete rubbish. I'm taking about a simple deferred annuity - fully guaranteed.

Example

Male age 45
Retirement Age 65
Contribution £10000 (gross)

Result Guaranteed Pension £1,231.08 per annum.

This is a pure product plug. The figures here can be replicated at:

https://grp.canadalife.co.uk/DataRSP.aspx

Here is the adviser guide:

https://grp.canadalife.co.uk/Downloads/Documents/Guide.pdf

markr007

20-30% lighter mortality in 17 years might be true at some ages but this does not translate into 20-30% increases(or reductions depending on how you look at it) in annuity rates.

zygurat789

mbarge wrote: »

I doubt that's right - have you allowed for future improvement to mortality which will affect annuity rates? 17 years from now mortality rates are projected to be 20%-30% lighter than they are today.

I think you'll find that the then prevailling interest rates will have more effect than anything else. Please don't tell me interest rates can go any lower.

mbarge

zygurat789 wrote: »

I think you'll find that the then prevailling interest rates will have more effect than anything else. Please don't tell me interest rates can go any lower.

The following are from previous posts of mine above....

And what about interest rates? This is not a 17 year risk it's more like a 50 year risk.

The second is the shape of the yield curve
Longer duration deferred annuities benefit over immediate annuities from an upward sloping yield curve. The yield on 10-15 year Gilts is around 3.5% whereas longer term Gilts used to price deferred annuities are yielding over 4%.

mbarge

zygurat789 wrote: »

Please don't tell me interest rates can go any lower.

Interest rates can go lower. A few months ago they were 25bps more than they are now. Perhaps this is a response in part to the economic policies of the new government. In any event at over 4% (long term gilt yields used to price deferred annuities) there's plenty of room to go down from here.