When will annuities be better value??

srcandas

It seems that annuities are very expensive at the moment although are beginning to move up slightly in recent months. Some commentators suggest they may now start to get better.

As a non expert am I right in thinking that interest rates need to rise for there to be a substantial improvement?

And what timescale do I need to build into my strategy?

Could waiting two years make a big difference?
Or would it need to be 5+?

If you have conservative invested funds do people think it is a good idea to blow ISA money and wait as long as possible?

Any thoughts would help me formalise my strategy. I know there are no guarantees

:beer:

taking_stock

as far as i'm aware, the 2 main factors are increasing longevity and long-term gilt yields.
personally, i believe the first of these is all played out, in that increasing life expectancy wont adversely affect annuity rates very much (if at all) in the future.
as for gilt yields - a consequence of all this QE - i can only see them increasing in due course. the problems is, i dont know when or how much!

Nearly_Old

I've just been through the whole process over the past 4 months: annuity vs drawdown and then take the annuity now or wait 2 years to see if the rates improve. My IFA produced a number of detailed reports outlining the benefits / risks but he also concentrated very much on how we wanted to spend our retirement.

When looking at postponing the annuity amongst all the unknowns he assumed that the date of death was fixed. So postponing by 2 years meant 2 years less income from the annuity and if rates rose by 1% over the next 2 years it would take almost 13 years to recover that lost income. So I took the annuity now and will enjoy spending the money on things that we have planned to do now because nobody knows when the curtain will finally come down.

At the end of the day its all looks like a bit of a gamble so I tried to a) make the decision; b) resolved never to look back and see if it was the "right" decision; and c) get on enjoying life.

sandsy

As far as investment returns go, you need to take a view on long term gilt yields. If long term gilt yields don't change, then annuity rates won't change much either.

On longevity, there's a couple of different factors at play. I disagree with the previous poster that longevity improvements are all factored in. Basically, the figures I've got on future mortality improvements indicate that someone retiring at 65 today wil receive about 2% more than someone retiring at 65 in 5 years time. The 2% factor holds quite strongly for each set of 5 years, ie. for someone who is 25 now, ie. 8 sets of 5 years away from 65, the forecast annuity will be about 14%-16% less than current annuity rates.

The other mortality factor is gender equality at the end of this year. I'd expect the income from a male annuity to drop somewhere in the region 3-6%. For women, there may be improvements of the order of 0-3%.

srcandas

sandsy wrote: »

The other mortality factor is gender equality at the end of this year. I'd expect the income from a male annuity to drop somewhere in the region 3-6%. For women, there may be improvements of the order of 0-3%.

I hadn't factored that in to my calculations - a big thanks for that.

So possibly despite leaving my 9.3% for three more years and continuing to dribble £800 per year in I might be better to take it in August. Or maybe having a guarantee it will be immune from that? O hell this is difficult

However as nearly old suggests you may not live long enough to enjoy it :beer:

Gracchus_Babeuf

Annuities will never, ever be good value. This is why I suggest avoiding them like the plague if you can possibly do so. If this moronic government had any sense they would allow pension fundholders to invest in property, where they would get a better return and also safeguard their capital.

atush

you have a GAR so it is differnet for you. You already know the rate you will get.

If new money is being allowed in, then the 800 you put in this year will get 9.3% interest. So, if you don't want to retire now, or leave it then go for it- but current annuity rates aren't going to affect your and your GAR.

I would instead look at your other savings and if you want to work 3 more years to whack more into ISAs?

Freecall

I have to say that I have some sympathy with the view of Gracchus.

Time and time again we see people in the know on this board suggesting that with a well managed portfolio of investments that, over time, it should be possible to achieve a reliable 6% - 8% return before tax and this is with all the fees and charges that the small investor must face.

Why then do companies selling annuities offer only 5% - 6% given that they are massive investors with all the economies of scale? They would probably talk about risk but with such massive funds it should be possible to proportionately mitigate risk.

Oh, and of course at the end of the day they get to keep the capital!!

sandsy

Freecall wrote: »

Oh, and of course at the end of the day they get to keep the capital!!

What on earth makes you think they keep the capital?! The annuity quoted is based on a mixture of investment returns and return of capital. Whilst it may appear that they keep the capital for those who die early, in fact, that capital goes to fund the annuities of those who live longer than their life expectancy. The whole concept of insurance is built on the pooling of risks.

In fact, vountary purchase annuities indicate the amount of capital and interest in each payment for tax purposes. In theory, the same could be done for compulsory purchase except there's no point as they've already had the tax advantage.

srcandas

Freecall wrote: »

Time and time again we see people in the know on this board suggesting that with a well managed portfolio of investments that, over time, it should be possible to achieve a reliable 6% - 8% return before tax and this is with all the fees and charges that the small investor must face.

Why then do companies selling annuities offer only 5% - 6%

Agree with that but when it comes to the decision there is another factor and that is flexibility.

As far as I see it with draw-down:

• I can take exactly each year what I want (up to the limit with capped).
• I can still switch to an annuity later especially if there is a good offer.
• I can have a state pension, a private pension, and a draw down. It is not all or nothing.
• draw-down releases my 25% tax free but I do not have to start taking money out.

Hope I got that right but for me not having a draw down on that basis now seems crazy.

What concerns me is apart from the knowledgeable folk here such routes have not been offered or explained by any of my providers (4) or the random cold call 'want to buy an annuity' pests.

Gracias one and all
:beer:

Freecall

sandsy wrote: »

What on earth makes you think they keep the capital?! The annuity quoted is based on a mixture of investment returns and return of capital. Whilst it may appear that they keep the capital for those who die early, in fact, that capital goes to fund the annuities of those who live longer than their life expectancy. The whole concept of insurance is built on the pooling of risks.

In fact, vountary purchase annuities indicate the amount of capital and interest in each payment for tax purposes. In theory, the same could be done for compulsory purchase except there's no point as they've already had the tax advantage.

Exactly, and that is why IMHO the returns should be better than 5% from an annuity contract.