Osborne's latest policy

redbuzzard

It's inevitable that there will be people for whom "cashing" an annuity is the right thing.

The suggestion is often made that annuities are poor value for younger retirees and they should draw down or use savings while waiting a few years to buy one. Here we potentially have people doing the opposite, and losing the "turn" in the process.

I suppose it might work for younger people who haven't had the annuity for long and "did the wrong thing", but the loss will be a shock and I wonder if some will just be doing the wrong thing twice.

Hard to argue with the principle that people should be allowed to do what they want with their money, but so many people seem utterly baffled by pension decisions that I fear the addition to the sum of human happiness will be small.

System

redbuzzard wrote: »

Hard to argue with the principle that people should be allowed to do what they want with their money, .

The curious thing is that today's pension investors are so financially savvy that they can be fully trusted to make their own decisions regarding cashing in their pensions and buying lamborghinis, yet only a few years ago they were easy prey to sellers of poor value annuities, and now need to be helped out.

jamesd

N1AK wrote: »

Who on earth would invest £58k to get £3.6k pa for as long as someone else, who has been retired for 5 years, lives? If we take ridiculous assumptions (the person is now 60, you could only earn 2% on the capital if you kept it, running your business is free) then they'd have to live to 86 on average for it to break even.

There's more to it than that. Part of it is that in the radio broadcast the annuity sale was said to happen at age 70, so the purchase happened five years earlier at age 65 (04:20 into the show). The actuary also said £58,900 but I'll ignore that 900 here even though it makes the picture worse for the buyer.

Using the 2010-based data UK cohort life expectancy for a 55 year old man in 2010 was 31 more years, to age 86. For a 60 year old man it is 26.1 years. That takes them to 86.1 years at death with only 0.1% as profit, plus any gains due to life expectancy improvement.

55 is way too young to be buying an annuity so instead of the worst case you used some others might be life expectancies at 65 of 21.7 years, 70 of 17.5 years, 75 of 13.6 years and 80 of 10.2 years. The gains over five years mean a life expectancy based age margin for profit for various selling ages of:

80: 90.2 - 88.6 = 1.6 years
75: 88.6 - 87.5 = 1.1 years
70: 87.5 - 86.7 = 0.8 years
65: 86.7 - 86.1 = 0.6 years

So how does the return look using those numbers?

17.5 x 3600 = 63,000. Subtract the 58,000 purchase price leaves £5,000 of profit. 5000 / 58,000 + 1 = then x^y ( 1/17.5 )-1 then x 100 on the calculator gives an annual return of just 0.47% over the period.

The other guest initially suggested that instead of £58,900 an appropriate price would be "£35,000, perhaps as much as £40,000". "At best .... if all the EU regulations were applied well for the consumer ... you might get 45". So how do those work out:

£35k: (63000-35000)/35000 +1 = x^y (1/17.5)-1 then x100 = 3.42%
£40k: (63000-40000)/40000 +1 = x^y (1/17.5)-1 then x100 = 2.63%
£45k: (63000-45000)/45000 +1 = x^y (1/17.5)-1 then x100 = 1.94%

These returns aren't the sort of thing to cause individual investors to run down the street telling everyone what a wonderful investment they have just made.

For an insurance company selling annuities the picture is more attractive, though. Each policy they buy also works to reduce their overall exposure to longer life expectancy risk. So for the insurance company there is some extra value that can be factored into the price/profit due to their reduced risk exposure and their potential cost of insuring against it.

The EU rules can be interesting. Would the buyer be allowed to offer different prices to male or female sellers, as they should, because female sellers deserve a higher price due to higher anticipated longevity and hence higher expected income before death? Once the EU rules came in they weren't allowed to do it when selling the annuity so had to pay men less and women more income than they merited at that time. There's a potential for a legislative profit to be made here if they can offer the appropriate prices to men and women. If they can't offer correct prices and there are TV ads for this, expect them to be more frequent when women are likely to be watching and not at all when men are, as the firms try to get more profitable customers: the women, who would have to be paid less than their annuity income streams are really worth.

DaveMcG

redbuzzard wrote: »

Hard to argue with the principle that people should be allowed to do what they want with their money

The whole (unwieldy) regulatory edifice is based on stopping people doing what they want with their money if it is highly likely that they will lose out.

The annuity seller must get less than value for their income. They *must* be ripped off. The only reason that the transaction can be rational is if the seller has a way to use the capital far more efficiently than the buyer (presumably a financial institution staffed with experts). That isn't very likely.

greenglide

The whole (unwieldy) regulatory edifice is based on stopping people doing what they want with their money if it is highly likely that they will lose out.

But wasn't it always the point that once money was put into a pension it stopped being their money.

The whole point of pensionsafter allhas always been to provide an income in retirement I thought.

redbuzzard

greenglide wrote: »

But wasn't it always the point that once money was put into a pension it stopped being their money.

The whole point of pensionsafter allhas always been to provide an income in retirement I thought.

Yes my first reaction was horror and I am still uncomfortable about possible unintended, even as yet unforeseen, consequences.

It's an odd way for a nanny state to carry on!

jamesd

DaveMcG wrote: »

The annuity seller must get less than value for their income. They *must* be ripped off. The only reason that the transaction can be rational is if the seller has a way to use the capital far more efficiently than the buyer (presumably a financial institution staffed with experts). That isn't very likely.

That is not true. They must get less than the amount of their income but if they are anywhere close to state pension age and able to defer, they can make a substantial gain by selling and using the money to defer their state pension.

For those reaching state pension age before April 2016 the state pension deferral option pays 10.4% inflation-linked and mostly inheritable by a spouse. An inflation-linked annuity at common ages is likely to pay 3% or so, though linked to RPI rather than CPI, so about 1% more inflation-linked increase a year. The difference between those two rates is huge and makes selling and deferring an easy decision for anyone getting good financial advice. Similar for level annuities, even those don't come close to 10.4%, let alone index-linked. Even enhanced annuities would struggle to match this rate in most cases.

For those reaching state pension age from 6 April 2016 the reduction to 5.6% not inheritable makes it less of a gain but it'll still be enough to make selling profitable if the price is reasonable.

This is one situation where both buyer and seller can make money, with their mutual gains coming out of the National Insurance budget over time. There's no actual higher NI cost because the seller already had the option, all they are doing is getting back to the point where they can do something that they could already have done.

Triumph13

DaveMcG wrote: »

The annuity seller must get less than value for their income. They *must* be ripped off. The only reason that the transaction can be rational is if the seller has a way to use the capital far more efficiently than the buyer (presumably a financial institution staffed with experts). That isn't very likely.

You're making the mistake of equating utility with monetary value. There could be many cases where the utility of a lump of cash now is higher than that of a small income stream for life - and not just for cases where Big Al is going to break your legs if you don't pay your gambling debts.
There will be people out there with several different pensions in payment who are relatively income rich but capital poor for whom it could be a very good deal in terms of overall happiness to trade a small income they don't need for a lump sum they could do something they really want to with.
I agree that for the vast majority of annuitants it will not make financial sense to sell their annuity, but as to whether we should have a law banning such sales out of hand? I'm afraid that jars with my natural libertarianism.

Pincher

WeBuyAnyAnnuity.com


There are always people who will buy junk bonds if they are cheap enough. There will be people picking up Greek debt for 0.1% face value, because the next idiot will buy it for 0.2%.


Very soon, they will package the Annuities up into Longevity Bonds, which seem to keep paying out, so the people buy and sell them like any other bond. Obviously, the insiders will offload the toxic ones onto fund managers who have no mates, and the whole thing collapses eventually.

DaveMcG

Triumph13 wrote: »

You're making the mistake of equating utility with monetary value. There could be many cases where the utility of a lump of cash now is higher than that of a small income stream for life - and not just for cases where Big Al is going to break your legs if you don't pay your gambling debts.
There will be people out there with several different pensions in payment who are relatively income rich but capital poor for whom it could be a very good deal in terms of overall happiness to trade a small income they don't need for a lump sum they could do something they really want to with.
I agree that for the vast majority of annuitants it will not make financial sense to sell their annuity, but as to whether we should have a law banning such sales out of hand? I'm afraid that jars with my natural libertarianism.

I emphasised the financial side of the transaction as that is all that can be measured.

As I said earlier, when reviews of pension opt outs and transfers was ordered by the regulator, utility was ignored in the review process.

No adviser will be able to recommend selling the income stream as a course of action based on utility. If they do they will ultimately fall foul of the FOS, there is no doubt about that.

and jamesd - I know about your niche area which incidentally due to its personal nature is obv a case where the seller has a way to use the capital far more efficiently than the buyer