Is this calculator right?

FatherAbraham

atush wrote: »

6.4K is low for an annuity for a 65 year old, so you can see buying an annuity at age 55 is not the best plan. They get better value later on after age 70.

No, in terms of the income provided during one's lifespan, it's far better to buy one as young as possible, thanks to the cross-subsidy of mortality drag.

Nearly everyone seems to think that annuities get better as one gets older, and people defer taking them. This is entirely wrong, because people concentrate on the "yield", and forget to account for the extra income payments received by talking it early.

Delaying taking an annuity until 70 is a terrible strategy, because one loses all the uplift available from one's co-annuitants who died before reaching 70.

Annuitize as early as you can, and reap the benefits of others' untimely deaths.

Warmest regards,
FA

jamesd

FatherAbraham wrote: »

However, the consequneces of failure can be horrendous, so it's best avoided.

Drawdown is probably the most rapidly growing retirement income product today, with annuities in decline and is likely to be greatly stimulated in the future by the pension rules changes. It's also a substantially lower risk solution than drawdown, once all risks are considered.

I'm more interested in equipping people to deal with investments during both accumulation and income stages than telling them to buy balanced managed funds then an annuity. Unless, having been exposed to education about their options and how to manage things, they make a free choice, not out of ignorance, to do those things. It's all part of financial education.

For drawdown to fail requires an unwillingness to adjust income levels to match initial planning if things turn out to be the lower end of possible results. Meanwhile, in more normal cases, it will end up with significantly more income than an annuity would provide, at normal purchase ages. At any time the individual also has the option to convert all or part of the capital to an annuity, as they may well choose to do when they become old enough or ill enough for the annuity to change to providing good value compared to investments overall, not to low income government bonds only.

By contrast, a comparable inflation-linked annuity produces a poor income result - well below 4% and worse still at normal market results - at common purchase ages and can produce a horrendous result, even including avoidable death, if a person needs to pay for long term care, medical treatment or any other unpredictable capital cost after having blown their money on an annuity purchase. The annuity also guarantees nil inheritance value in all cases, barring continued income for a few years if a guarantee is purchased, or possibly longer if a spousal income option is purchased, both of which further reduce income levels.

There does come a point when an annuity can be good value. Age 55 being contemplated here is not normally going to be one of those because there is negligible cross-subsidy from those who die early to those who die late when the annuity is being purchased more than thirty years before the life expectancy of the population overall.

Later in life, sometime after age 75 and perhaps after 80 for those in normal good health the cross-subsidy does start to become more significant.

Meanwhile, the government has announced a welcome change to annuity rules that will allow annuities that reduce their income level. That may allow annuity providers to reduce the very high cost currently paid for low probability of annuity failure by using more of a greater range of investments to offer higher income but possible step down of income if well defined persistent adverse market conditions happen. At which point such a product might start to be able to compete better with drawdown on income and some risk measures, though probably still without the flexibility to deal with capital spending needs and so at higher overall risk level than drawdown.

A large segment of the population, after being educated a bit about investment management, will simply decide that they don't like the idea of managing investments, don't want to learn, don't want to do it or don't want to pay a professional to do it and will go for balanced managed then annuity purchase. I think that's fine: educated consumers making an educated choice.

One thing I am not keen on is scare-mongering to the inexperienced instead of at least trying to help them to learn first.

jamesd

FatherAbraham wrote: »

No, in terms of the income provided during one's lifespan, it's far better to buy one as young as possible, thanks to the cross-subsidy of mortality drag.

That is a false claim.

FatherAbraham wrote: »

Nearly everyone seems to think that annuities get better as one gets older, and people defer taking them. This is entirely wrong, because people concentrate on the "yield", and forget to account for the extra income payments received by talking it early.

That is a false claim.

FatherAbraham wrote: »

Delaying taking an annuity until 70 is a terrible strategy, because one loses all the uplift available from one's co-annuitants who died before reaching 70.

That is a false claim.

FatherAbraham wrote: »

Annuitize as early as you can, and reap the benefits of others' untimely deaths.

Don't follow such advice for mug insurance company customers.

Annuities purchased at young ages produce poor lifetime income results because:

1. there is low cross-subsidy from those who die early at young ages, notably younger than age 75, except in cases of ill health.
2. there is a high cost paid at the time of purchase for the low chance of annuity income failure and this reduces the possible income level.

By contrast, the alternative strategy of income drawdown at younger ages followed by optional annuity purchase once the cross-subsidy starts to become substantial can be expected to produce a higher lifetime income and higher total (including inheritance) value than a pure annuity approach. It also allows the flexibility of preserving capital for inheritance or unexpected expenses.

Your claims appear to be completely ignoring the simple fact that since April 2006 people are no longer forced to buy an annuity and accept the high initial cost and low flexibility of annuities. Today people have a choice and can use drawdown, annuity purchase or one then the other, perhaps gradually buying more annuity over time as age increases to the point where the cross-subsidy becomes significant or ill health and lack of or limited inheritance provision desire may make one or more annuities a more attractive option.

At all ages, though, there will be some people who simply have low risk tolerance or low interest in learning or paying experts and will not want to invest or accept much chance of income variation but will choose cash savings followed by annuity purchase to get that low variability result.

Along the way, though, we should not be misinforming them by claiming that annuities offer the best income levels or that it is better to buy one early rather than later. Instead we should be educating them about the alternatives and costs of their choices so that they can make a better informed decision. Those costs aren't just in lower likely income but also the lost flexibility to deal with life's contingencies that purchasing an annuity delivers.

greenglide

I'm more interested in equipping people to deal with investments during both accumulation and income stages than telling them to buy balanced managed funds then an annuity. Unless, having been exposed to education about their options and how to manage things, they make a free choice, not out of ignorance, to do those things. It's all part of financial education.

But what percentage of the population are actually, seriously, really, genuinely able to manage investments to make drawdown work?

50%, 25%, 10%?

Whichever you believe that leaves a lot of people who are exposed to making serious mistakes because they are unwilling or unable to manage a pension fund themselves.

We see it all the time here - wanting to get the money out of DB or DC schemes for lots of spurious reasons, opt out of auto-enrolment, lots of people who have huge credit card debts etc, people who "live for today" and yet they are still expected to manage a pension fund?

Annuities at least give these people "some" income, the problem tends to be that the money in the fund is so small that the income, from any product, will be small.

We desperately need to change the mindset away from "living for now" and convince people that life expectancy is much longer than most of us think and then try to educate people in financial matters. It requires trust and trust is a very rare commodity these days.

Since annuities are considered to be "complex" products (one of HMGs reasons for people not wanting to buy one and making mistakes) then how can managing a drawdown fund be easier?

atush

People without the time and inclination to learn, can hire an IFA.

It isn't a choice just between DIY DD and annuity.

I am personally considering a mix, mainly DD but an annuity with a tranche of pension funds. Call it an insurance choice.

greenglide

People without the time and inclination to learn, can hire an IFA.

But what about those who don't have the ability (real or perceived) to learn. Those who were in set 5 (or lower) at school? Those who ended up in unskilled jobs throughout there working lives?

They end up living on just the state pension.

They were supposed to benefit from SERPS and more so from S2P but that is now going with auto-enrolment to replace.

I don't know what the answer is, we only see, generally, those with the earning power to at least try to save.

atush

I assume they are those who will be auto enrolled and with have the opportunity to buy an annuity or hire an IFA if they choose to.

Or spend it on trips to Benidorm.

jumperabv3

I'm the OP who started this thread.
I've just noticed so many replies were added to this thread.

To be honest it's quite difficult to follow up with everything you said here, I've already lost the plot as to who's right and who's wrong...

You mentioned if you're confused then contact a FA.
I can tell you I'm not against using a financial adviser, but once I spoke to one, he asked me so many questions in email I couldn't answer many of them and eventually I gave up on it ...

I contacted another one, hoping it would go smoothly, but he told me he would get back to me the next day and he never did ...

So what I did ...
I just went on to Aviva's website, registered online, the process took me about 10-15 minutes the most, I set up my pension pot and started depositing at my own pace.

I told Aviva to keep the pot in their safest plan, the one that currently pays almost no interest ... simply because for me the "interest" of 25% I get from the govt. on top of what I put into the pot is more than enough, and I'm not looking to risk those 25% but simply rather keep them and that's it.

I like things straightforward ... whenever people make it complicated I just go and look for a different route, but that's me.

Linton

FatherAbraham wrote: »

.......

Delaying taking an annuity until 70 is a terrible strategy, because one loses all the uplift available from one's co-annuitants who died before reaching 70.

According to the Government Actuary's statistics 87% of males alive aged 55 today can be expected to reach their 70th birthday. And I think it is reasonable to assume that those who could buy something more than a trivial annuity at 55 are richer than the average and therefore more likely to live longer. So the uplift is there but it's not large.

atush

jumperabv3 wrote: »

I'm the OP who started this thread.
I've just noticed so many replies were added to this thread.

To be honest it's quite difficult to follow up with everything you said here, I've already lost the plot as to who's right and who's wrong...

You mentioned if you're confused then contact a FA.
I can tell you I'm not against using a financial adviser, but once I spoke to one, he asked me so many questions in email I couldn't answer many of them and eventually I gave up on it ...

I contacted another one, hoping it would go smoothly, but he told me he would get back to me the next day and he never did ...

So what I did ...
I just went on to Aviva's website, registered online, the process took me about 10-15 minutes the most, I set up my pension pot and started depositing at my own pace.

I told Aviva to keep the pot in their safest plan, the one that currently pays almost no interest ... simply because for me the "interest" of 25% I get from the govt. on top of what I put into the pot is more than enough, and I'm not looking to risk those 25% but simply rather keep them and that's it.

I like things straightforward ... whenever people make it complicated I just go and look for a different route, but that's me.

You just need to read it over more slowly.

Anyway, I have to say that putting your pension in cash is unlikely to be a good thing to do, esp if you are holding for more than 5 years. AS even with the tax relief, eventually inflation will eat that extra money up. But marginally better than puttin cash into a savings acct anyway.