Decent annuity rate?

dunstonh

I have had four experiences - two in the US and two here - and all four left a sour taste and a hole in my bank balance.

You cant compare the US to here. US is sales based and lower regulated. Here is fee based and not influenced by product.

In particular, it seems impossible to obtain "light touch" advice. You either have to dive in and pay gobs of money for on-going advice and management of your finances or go completely DIY.

Advice requires a number of standards to be met. In higher risk advice areas, greater information is required and currently, retirement income options is considered a higher risk advice area.

You are also incorrect about paying for ongoing advice. It can be ongoing, transactional or ad-hoc. In the case of annuities, there is no ongoing.

What a lot of people want is an expert eye cast over their plan and an opinion. Or they know exactly what they want (in the example of annuities) and just want to be told - where is the best deal that fits this description?"

There is no "or" there. That is the same thing.

dunroving

dunstonh wrote: »

You cant compare the US to here. US is sales based and lower regulated. Here is fee based and not influenced by product.



Advice requires a number of standards to be met. In higher risk advice areas, greater information is required and currently, retirement income options is considered a higher risk advice area.

You are also incorrect about paying for ongoing advice. It can be ongoing, transactional or ad-hoc. In the case of annuities, there is no ongoing.



There is no "or" there. That is the same thing.

I think I can compare the US to here. In both cases, the IFAs were a mix of fixed-fee and commission based (1 of each in the US and UK). Also, the concerns I had in all four cases were the same. So there is a consistent pattern that is independent of country and payment system. Besides I was only recounting my experiences; they are what they are. My main gripe is they didn't listen.


I know it can be transactional, etc., etc. My gripe is that as with car sales, the salesman often doesn't inform you of your choices or uses techniques to pressure you in one way or another, and not necessarily because they have your best interests at heart.


On the last point, I'd say there is an "or".


Situation One: "We are considering taking out a joint life annuity, inflation-adjusted, with a 5-year guarantee, for these reasons. What is your professional opinion and feedback? Are we missing anything major here?


Situation Two: "We know we want a joint life annuity, inflation-adjusted, with a 5-year guarantee, and we don't need your opinion on the reasons. Please tell us which company will give us the best deal"


- Are these not different situations?

jamesd

dunroving wrote: »

Might be a daft question, but I have been quoted the following rates for a single-life, lifetime annuity with a 15-year guarantee:

At age 60: 6.15%
At age 65: 6.81%

- this is pretty good, yes???

No. I assume those are level annuities. Deferring the state pension gets you either 10.4% plus spousal pension of probably at least 50% for state pension age before flat rate comes in or 5.8% with no spousal pension after. All inflation-protected by CPI.

To work out alternatives consider say using cash earning just inflation while waiting. Then draw on your pension pot at the annuity rate and work out how much inflation-linked income you could by by deferring at state pension age.

dunstonh

In both cases, the IFAs were a mix of fixed-fee and commission based (1 of each in the US and UK).

Commission was abolished in the UK on advised cases.

So there is a consistent pattern that is independent of country and payment system.

or not as the case is.

I know it can be transactional, etc., etc. My gripe is that as with car sales, the salesman often doesn't inform you of your choices or uses techniques to pressure you in one way or another, and not necessarily because they have your best interests at heart.

Again, you are mixing up systems. There is no product bias in the UK with advisers as the remuneration is fee is paid by you and not the product provider.

Situation One: "We are considering taking out a joint life annuity, inflation-adjusted, with a 5-year guarantee, for these reasons. What is your professional opinion and feedback? Are we missing anything major here?

So, in other words asking for advice.

Situation Two: "We know we want a joint life annuity, inflation-adjusted, with a 5-year guarantee, and we don't need your opinion on the reasons. Please tell us which company will give us the best deal"

And again, asking for advice.

Situation one is asking for advice on methods
Situation two is asking for advice on which company.

- Are these not different situations?

No. Both asking for advice. In both cases, the adviser would not eliminate all available options even if you dont want a particular method. Doing an annuity without first having an audit trail that shows reasons for elimination of drawdown would leave the adviser open to as successful complaint against them should you later decide you should have gone into drawdown.

In some areas, an adviser can record you as an insistent client. However, in areas of high risk advice, firms are less inclined to do that as the FOS often rules that people are not in a position to know what is right or wrong for them and an adviser cannot transact things that they know could be wrong for that person.

If you only want to get a rate comparison then use a internet site to get comparison rates. They are not advised. However, dont expect the annuity rate to be as good as what an adviser can get as the commission will likely exceed the adviser fee and result in a lower annuity rate (and not have the benefit of the adviser obtaining better terms through haggling which a computer would not do).

jamesd

Say you have a £50,000 pot, anticipate a state pension of £8,000 in today's money, are 60, have a state pension age of 66 and inflation is 3% a year. 6.15% annuity rate is £3,075.

Year 1: Draw £3075, pot now £46925.
Year 2: Draw £3075, pot now £43850, real value of £3075 is £2985.
Year 3: Draw £3075, pot now £40775, real value of £3075 is £2898.
Year 4: Draw £3075, pot now £37700, real value of £3075 is £2814.
Year 5: Draw £3075, pot now £34625, real value of £3075 is £2732.
Year 6: Draw £3075, pot now £31550, real value of £3075 is £2652.

Now at state pension age, deferring starts. State pension of £8,000 is now worth nominal £9,552.41.

Year 7: Draw £3075 + £9552.41, pot now £18992.59, real value of £3075 is £2652. State pension deferral value of £554.43 nominal.
Year 7: Draw £3075 + £9838.98, pot now £6,087.61, real value of £3075 is £2575. State pension deferral value of £1141.32 nominal.

The pot can't fully fund another year so I'll pro-rate

Year 8: Draw £3075 + £10134.14 needs £13209.14, 6087.6 / 13209.14 = 0.4608 so 0.4608 x 5.8% deferral gain, 2.67%. Real value of £3075 is £2500.26. State pension deferral value 2 x 5.8 + 2.67% of £10134.14 = £1446.14 nominal.

So in the long wait case with just inflation-based investment gain, the annuity looks like a better normal life expectancy buy than the state pension, with the state pension deferral only eventually better for the long life case after it's caught up also on the past payments shortfalls.

dunroving

jamesd wrote: »

No. I assume those are level annuities. Deferring the state pension gets you either 10.4% plus spousal pension of probably at least 50% for state pension age before flat rate comes in or 5.8% with no spousal pension after. All inflation-protected by CPI.

To work out alternatives consider say using cash earning just inflation while waiting. Then draw on your pension pot at the annuity rate and work out how much inflation-linked income you could by by deferring at state pension age.

A major consideration for me is genetic life expectancy, so deferring state pension is not a sensible option, albeit I recognise the value of doing it (especially for UK State Pension).


The annuity I mentioned above is a flat rate, as you guessed (forgot to include that). If I could get a comparably good inflation-adjusted rate, I'd likely go for that, although this only constitutes a small portion of my overall pension investments. I can accept the loss over time of a flate-rater, and the lower rate for taking at age 60, considering my break-even calculations.


The offer in question is in the US, on a pot I am prevented from bringing over here because of state regulations. I thought this might be a handy source of guaranteed income to supplement/balance my other pension income plans. I also like the 15-year guarantee in case I pop my clogs before I reach 75. As I can't find anything comparable in the UK e.g., even with only a 5-year guarantee, taken at age 65, the best level annuity rate is low 5%'s, it seemed like a decent deal.


I'm hoping some of the subsequent posts to my OP will elicit helpful information on where to find UK annuity rates easily, and what the best rates seem to be.

dunroving

dunstonh wrote: »

Commission was abolished in the UK on advised cases.


or not as the case is.



Again, you are mixing up systems. There is no product bias in the UK with advisers as the remuneration is fee is paid by you and not the product provider.



So, in other words asking for advice.



And again, asking for advice.

Situation one is asking for advice on methods
Situation two is asking for advice on which company.



No. Both asking for advice. In both cases, the adviser would not eliminate all available options even if you dont want a particular method. Doing an annuity without first having an audit trail that shows reasons for elimination of drawdown would leave the adviser open to as successful complaint against them should you later decide you should have gone into drawdown.

In some areas, an adviser can record you as an insistent client. However, in areas of high risk advice, firms are less inclined to do that as the FOS often rules that people are not in a position to know what is right or wrong for them and an adviser cannot transact things that they know could be wrong for that person.

If you only want to get a rate comparison then use a internet site to get comparison rates. They are not advised. However, dont expect the annuity rate to be as good as what an adviser can get as the commission will likely exceed the adviser fee and result in a lower annuity rate (and not have the benefit of the adviser obtaining better terms through haggling which a computer would not do).

I know Commission was abolished in the UK on advised cases, as well as lot of the other things you're stating. Do you have an opinion on the original question, or are you just interested in picking away at people's opinions?


In my own profession, there are many parallels with the financial advice sector (i.e., we give professional advice) so I am just going on what my experience is of the way IFAs have responded to my requests for help, compared to my own profession.


We don't tend to assume because we have PhDs and know more than our clients that gives us a right to be rude or condescending, for example.

jamesd

Given reduced life expectancy, and you appear to have some enhancement;

At age 60: 6.15% vs normal no guarantee 4.813%
At age 65: 6.81% vs normal no guarantee 5.471%

So you're getting a pretty significant increase. I do wonder what effect the 15 year guarantee is having, though, wondering how close that is to life expectancy.

A financial adviser is the way to go for enhanced annuity negotiating. Best buy tables just won't give you a good enough answer in such a case.

Your enhancement makes you a tougher case for the state pension deferral but I'll still do the shorter term calculation to illustrate the principal and in case it is useful.

jamesd

Now the shorter delay case, £50,000 pot, anticipate a state pension of £8,000 in today's money, are 65, have a state pension age of 66 and inflation is 3% a year. 6.81% annuity rate is £3,405.

Year 1: Draw £3405, pot now £46595.
Year 2: start deferring, draw £3405 + £8240, pot now £34950.
Year 3: draw £3405 + £8487.20, pot now £23057.80.
Year 4: draw £3405 + £8741.81, pot now £10910.99.
Year 5: need to draw £3405 + £9004.06 = £12409.06. 10910 / 12409.06 x 5.8% = 5.09% deferral gain for this year. Deferral extra income is nominal ( 3 x 5.8% + 5.09% ) x £9004.06 = £2025.01.

At this point you'd have £2,025.01 CPI-linked income vs £3405 level income and it would take 18 years for 3% inflation to match the level income, more to recover the extra payments over those years.

So again based on your enhanced annuity rate the annuity looks like the better deal unless you want to provide for a long life contingency case. And you probably don't.

dunroving

jamesd wrote: »

Say you have a £50,000 pot, anticipate a state pension of £8,000 in today's money, are 60, have a state pension age of 66 and inflation is 3% a year. 6.15% annuity rate is £3,075.

Year 1: Draw £3075, pot now £46925.
Year 2: Draw £3075, pot now £43850, real value of £3075 is £2985.
Year 3: Draw £3075, pot now £40775, real value of £3075 is £2898.
Year 4: Draw £3075, pot now £37700, real value of £3075 is £2814.
Year 5: Draw £3075, pot now £34625, real value of £3075 is £2732.
Year 6: Draw £3075, pot now £31550, real value of £3075 is £2652.

Now at state pension age, deferring starts. State pension of £8,000 is now worth nominal £9,552.41.

Year 7: Draw £3075 + £9552.41, pot now £18992.59, real value of £3075 is £2652. State pension deferral value of £554.43 nominal.
Year 7: Draw £3075 + £9838.98, pot now £6,087.61, real value of £3075 is £2575. State pension deferral value of £1141.32 nominal.

The pot can't fully fund another year so I'll pro-rate

Year 8: Draw £3075 + £10134.14 needs £13209.14, 6087.6 / 13209.14 = 0.4608 so 0.4608 x 5.8% deferral gain, 2.67%. Real value of £3075 is £2500.26. State pension deferral value 2 x 5.8 + 2.67% of £10134.14 = £1446.14 nominal.

So in the long wait case with just inflation-based investment gain, the annuity looks like a better normal life expectancy buy than the state pension, with the state pension deferral only eventually better for the long life case after it's caught up also on the past payments shortfalls.

Wow, thank you for going to the trouble to create an illustration. I missed this post somehow. It'll take a cup of tea and a sticky bun before I can sit and digest this, but again, thanks.

jamesd wrote: »

Given reduced life expectancy, and you appear to have some enhancement;

At age 60: 6.15% vs normal no guarantee 4.813%
At age 65: 6.81% vs normal no guarantee 5.471%

So you're getting a pretty significant increase. I do wonder what effect the 15 year guarantee is having, though, wondering how close that is to life expectancy.

A financial adviser is the way to go for enhanced annuity negotiating. Best buy tables just won't give you a good enough answer in such a case.

Your enhancement makes you a tougher case for the state pension deferral but I'll still do the shorter term calculation to illustrate the principal and in case it is useful.

The pot in question is in the US with a company (TIAA-CREF) who would have to be the annuity provider. Luckily they are accepted to be very generous in terms of low fees and especially in terms of various types of annuities (the term doesn't mean exactly the same as here AFAIK, but close enough). The only drawback is that I the US, the "inflation-proofed" annuity isn't common (though there are annuities that are somewhat similar).


They also have what is called TIAA Traditional, which is a guaranteed return, protected capital instrument. Based on when I paid into it, the rates I get are better than recent entrants to the fund. That actually would be another avenue - draw annual "interest", leaving the capital in TIAA-CREF and then at 70.5 the Feds require you to either take out an annuity or enter a 10-year drawdown phase.


I could, under the state regulations, draw the money out over a 10-year period from age 59.5 (in 2 years, give or take). So I could eventually bring it over here and invest it here in an ISA or other investment vehicle/wrapper.


As it is a relatively small pot (about £25k) that is stuck over there (I can take the remainder of my plan as a lump sum or periodic withdrawal starting at age 59.5), I'm just trying to figure out something that is tax-efficient, somewhat simple, and ticks boxes of "good return", "guaranteed income" and "medium term protection of capital".