How down-drawers blow up

bmm78

zagfles wrote: »

But some people may only want one eg insurance against longevity. I'd like to see products such as delayed annuities, where at (eg) 65 you can pay either a lump sum from your pension pot or a monthly premium, and if you live to (say) 85, it then pays a guaranteed amount for the rest of your life.

Then you get to purchase the annuity at 65, rather than at 85, which will obviously make it a lot cheaper, albeit it (like with any insurance) it may never pay out. You can then plan drawdown on the basis of 20 years rather than guessing how long you'll live.

BTW does such a product exist already?

There isn't a product that does that directly that I'm aware of. Partnership released a product after the budget that secured an annuity rate at outset, but didn't actually kick in until a year's time - the first year was written under drawdown rules, with the choice of either the guaranteed annuity rate or a transfer value.

Unfortunately, the concept is more appealing than the reality, due to the rate being lower than available via an annuity, and the transfer value being less than you would get in drawdown. I suspect that will be the case with any deferred annuities, or indeed the majority of new products launched in the coming months and years. The halfway-house products will often be the worst of both worlds (annuity and drawdown) rather than the best, and will continue to be so until there is sufficient volume of sales to reduce the costs and provide better returns.

I don't think there is much appetite amongst most providers for deferred annuities. Deferred care annuities for long term care have sold poorly compared to the immediate variety, and the consensus seems to be that take up of deferred annuities in retirement will be low. I'm sure some provider will launch one at some point though.

jamesd

Unfortunately it's not a very useful story because all of the critical information needed is missing. We don't know:

1. Whether Aviva used a dual life inflation-linked annuity combined with life assurance or not, the product pair that's most comparable to drawdown, providing income for both and death benefits if they do not both live to the maximum possible age.

2. What health assumptions were used to work out the annuity to purchase at each age, significant in part because older people are more likely to have negative health factors that will increase annuity payment rates.

3. Whether they used the best annuities available in the market or only their own and how competitive theirs were.

4. What value Aviva placed on the remaining pension pot at the end of the period considered.

5. How many people Aviva assumed would die during the period considered and how they valued the remaining pension pot and income potential for those people.

6. How many people died because they had an annuity rather than funds to pay for medical care that would have kept them alive, or died after lower quality of life without being able to draw on capital at a higher rate to provide care that they needed towards the end of their shorter lives.

7. What income Aviva used for drawdown.

8. Whether the drawdown person had a prudent level of cash so that they didn't have to draw on investments during a market downturn.

9. Whether the drawdown person varied their income when they found that market conditions were adverse.

10. Whether the drawdown person took out insurance against early adverse outcomes in the form of options or covered warrants.

11. The total income and capital position of all those in the study across all cases. We know that they picked an unusual proportion of bad starting dates, though - at least one third bad over a period where the actual incidence wasn't that high.

If anyone has the actual report with the details of how they did things it might be interesting.

It almost certainly ignores all money at death, what happens to those who become sick or die and providing a lump sum at death as well as the usual prudent drawdown advice to have cash, adjust income and consider insurance against adverse market moves early on but it would be interesting to know just what they did and didn't do.

PeacefulWaters

What's best for Aviva's business?

Annuity or drawdown?

zagfles

bmm78 wrote: »

There isn't a product that does that directly that I'm aware of. Partnership released a product after the budget that secured an annuity rate at outset, but didn't actually kick in until a year's time - the first year was written under drawdown rules, with the choice of either the guaranteed annuity rate or a transfer value.

Unfortunately, the concept is more appealing than the reality, due to the rate being lower than available via an annuity, and the transfer value being less than you would get in drawdown. I suspect that will be the case with any deferred annuities, or indeed the majority of new products launched in the coming months and years.

But they offered a transfer option - this would have made it worse value because if the market moves people can change their minds. I'd do it as a straight "deferred annuity" with no transfer possibility.

Or perhaps a product such as an "inverse life insurance" policy. With this, you'd pay a lump sum at 65, and if you live to 85, it would pay out. If there was, say, a 50% chance of you dying between 65 and 85, then it should pay out double your premium plus investment returns (on presumably long dated gilts or something equally safe) minus charges.

Here there'd be no guaranteed annuity rate, so you'd have to purchase an annuity at the going rate at the time, so you're only insurancing against longevity, not changes in the annuity market.

I don't think there is much appetite amongst most providers for deferred annuities. Deferred care annuities for long term care have sold poorly compared to the immediate variety, and the consensus seems to be that take up of deferred annuities in retirement will be low. I'm sure some provider will launch one at some point though.

The long term care issue is different as people will think why bother insuring against something which the govt will pay for if I run out of money.

FatherAbraham

zagfles wrote: »

But some people may only want one eg insurance against longevity. I'd like to see products such as delayed annuities, where at (eg) 65 you can pay either a lump sum from your pension pot or a monthly premium, and if you live to (say) 85, it then pays a guaranteed amount for the rest of your life.

Then you get to purchase the annuity at 65, rather than at 85, which will obviously make it a lot cheaper, albeit it (like with any insurance) it may never pay out. You can then plan drawdown on the basis of 20 years rather than guessing how long you'll live.

BTW does such a product exist already?

You can synthesize one.

At 65, you take out a fixed-interest, twenty-year loan (which includes life insurance to repay the outstanding amount on your death), which is of just the right size that when you add the borrowed capital to your saved annuity-purchase capital, it can be used to buy an annuity which pays precisely the right amount to meet the monthly repayment on the loan.

Until you reach 85, the annuity income repays the loan, after which you get the improved income.

If you die earlier, the annuity payments stop, and the life insurance repays the outstanding debt.

The only unfortunate part is that the annuity income will be taxable, while the loan repayment is not tax-deductible. If the individual products were bundled together by a single provider into an integrated product, then the purchaser need never receive the loan-repayment income, and the tax anomaly could be entirely avoided.

Warmest regards,
FA

zagfles

FatherAbraham wrote: »

You can synthesize one.

At 65, you take out a fixed-interest, twenty-year loan (which includes life insurance to repay the outstanding amount on your death), which is of just the right size that when you add the borrowed capital to your saved annuity-purchase capital, it can be used to buy an annuity which pays precisely the right amount to meet the monthly repayment on the loan.

Until you reach 85, the annuity income repays the loan, after which you get the improved income.

If you die earlier, the annuity payments stop, and the life insurance repays the outstanding debt.

The only unfortunate part is that the annuity income will be taxable, while the loan repayment is not tax-deductible. If the individual products were bundled together by a single provider into an integrated product, then the purchaser need never receive the loan-repayment income, and the tax anomaly could be entirely avoided.

Warmest regards,
FA

Can't see how that would work - if you live to 85 you'll have paid a shed load of interest plus life insurance - what kind of interest rate would you pay on a 20 year fixed interest loan with life insurance? If you shove real figures into such a plan I doubt it'd make financial sense.

Thrugelmir

Your_Hero wrote: »

This has always the biggest risk with drawdown, which is why it is not suitable for everyone. Drawdown remains the higher risk approach to decumulation of pension funds because you risk outliving your capital, annuity rates further worsening etc.

There's also the risk of permanent capital loss. Shares held in the banks, BT, BP, Tesco and Glaxo spring to mind. Once capital is lost it's irretrievable as once in retirement there's no ability to replenish it. In an era of low interest rates people have become extremely complacent as to the multitude of risks that exist.

FatherAbraham

zagfles wrote: »

Can't see how that would work - if you live to 85 you'll have paid a shed load of interest plus life insurance

You wouldn't have paid a penny. The income from the annuity between the ages of 65 and 85 repays the loan, and covers the life-insurance premium.

You can hardly decry this structure as impossible, since it's precisely equivalent to the deferred annuity you were asking for.

As I mentioned, the differential tax treatment of income received and interest paid is a practical objection, which means that synthesizing this oneself is less efficient than if the constituent parts were bundled together by a "provider".

Warmest regards,
FA