MSE News: New pension freedom means it pays to know when you'll die

jamesd

Proxy wrote: »

Interesting contradiction in there: apparently a 5.5% annuity is 'crap' but in order to keep enough money for live you should draw "4 or 5% per year"

Such an annuity would be level, not increasing with inflation. The commonly used 4% drawing rate assumes increasing with inflation. At common retirement ages the corresponding annuities pay only 2.5-3.5%.

However, there are also rules to improve drawdown income rates without unduly affecting success rate and those can increase the initial prudent drawing rate to the 6-6.5% level, increasing with inflation except as adjusted by the rules.

The annuity also has another disadvantage: the money is spent. With drawdown the likely result is having the pension pot still there at the end, perhaps worth even more. It's the contingency really bad cases like a replay of the Great Depression that force lower rates for prudence and those are quire unlikely events.

Mostly, though, if you're considering an annuity the first thing you should do is compare to the far better value that you get by deferring the state pension. Then you know that you should laugh at anyone who tries to sell you an annuity at anything close to state pension age.

Pincher

Do people really want to live till 90?


I dread to think I'll be malingering from 80 to 90, and yuck, BEYOND.


Instead of deferring pensions, I want the state to pay me from age 67 to 80. If I am still living at 80, and I have run out of money and assets, they pay for the euthanasia and cremation.


They won't go for it, because it means they have to pay a lot more straightaway. Also, rounding up old codgers make bad TV.

bmm78

SnowMan wrote: »

If I put in my details into the Money Advice Service annuity calculator (I put in a notional fund of £100,000), and magically age myself suddenly to be age 65, then the cost of buying an inflation linked single life annuity (no guarantee) is about £29 for each £1pa of pension.

The research by the FCA indicated that escalating annuities linked to inflation are the worst value annuities you can buy in terms of getting your money's worth.

An asset-backed annuity is generally a much better option to protect against inflation, subject to having the right attitude to risk, capacity for loss etc.

jamesd

JimmyTheWig wrote: »

Why are rates so bad? Is there a gap in the market for a provider to come in and trump what everyone else is paying?

Someone already does trump annuities: us, via deferring the state pension. Laugh at anyone who tries to sell you an annuity after you've seen what deferring the state pension will pay instead.

Annuity providers are not allowed to fail to pay out the full amount, even in extreme conditions. This forces them to make investments that do not perform as well as those individuals can choose. Add overhead and profit margin and the annuity companies are operating at a severe disadvantage compared to individuals who can adjust spending.

torbrex

I don't know when I am going to die but I do know how much my pension fund will be (roughly) and I do know what kind of retirement income I will need, the rest is just arithmatic.

I will take the total sum of my pension fund and divide it by the income that I would like and that will tell me how many years I have to enjoy that income, after that I will fall back to the safety net of the state pension.
I have no-one to leave any inheritance to so there is no worries that way and the house is mine already so bring it on :T

SnowMan

bmm78 wrote: »

The research by the FCA indicated that escalating annuities linked to inflation are the worst value annuities you can buy in terms of getting your money's worth.

But buy a annuity with no increases or fixed increases and you are in trouble if inflation takes off.

Ultimately fixed increase and index linked annuities are priced based on the same thing, gilt yields (whether that be index linked gilts or conventional gilts).

You can play with the figures based on flat annuities also and reach the same conclusions.

bmm78 wrote: »

The capital on an annuity can be protected ("Value Protection").

It isn't as flexible as the death benefits on drawdown, and has to be selected at outset, but it provides benefits broadly similar to lump sums from a drawdown plan on death.

From April it will also be possible to include guarantee periods of upto 30 years on an annuity. How valuable this will be will depend on the figures to be fair.

Value protected annuities are a marketing gimmick in my view. You are paying money to unprotect you from the main advantage of an annuity that it pays out exactly for as long as you live.

You either want to be paid out an income for life (so an annuity is worth considering) or you want some money on death when you go the drawdown route, or you take a mix of these two approaches.

jamesd

greenglide wrote: »

for someone who has, maybe, £50,000 invested in pensions, has no other savings, has no real knowledge of how and where to invest, has never had £50,000 in their life and whose only income is the State Pension is the "take it now" policy really the way to go?

Yes. At a 2.9% RPI annuity rate that annuity would pay £1,450 a year for life. If the person instead takes the money and has a state pension of £8,000 then defers for five years using the £50,000 to pay the income the state pension and annuity would have paid, their state pension would increase by £2,505.

Buy the annuity and get £1,450 a year linked to RPI, take the money and defer and get £2,505 a year linked to CPI.

In general you should laugh at anyone who tries to sell you an annuity near to state pension age. It's unlikely that they are acting in your best interests. One major exception is some enhanced annuities, where the reduced life expectancy can be so great that deferring is a bad deal. Drawdown would probably pay more income in that situation.

dunstonh

But buy a annuity with no increases or fixed increases and you are in trouble if inflation takes off.

Just as you are if you take too much income from drawdown and leave nothing to give some growth to cover inflation (many would say that taking 4-5% from drawdown is too much)

Ultimately fixed increase and index linked annuities are priced based on the same thing, gilt yields (whether that be index linked gilts or fixed gilts).

You can play with the figures based on flat annuities also and reach the same conclusions.

Although annuities get the benefit for mortality gain and dont have things like platform costs to worry about.

I get where you are coming from and I am partly playing devils advocate but its not as clean cut as saying one option is better than another. The Govt is trying to turn a minority option that the regulator considered high risk into the mainstream option. For many, that will be a good thing but for many more, it will be a disaster waiting to happen.

telsco

This benefits the wealthy pensioner who probably would never have needed to touch their state pension but who can now grab it in one go causing a huge burden on the benefit system and the people who then be penalised to plug the black hole will be the real poor by having their benefits reduced or frozen again.

SnowMan

dunstonh wrote: »

I get where you are coming from and I am partly playing devils advocate but its not as clean cut as saying one option is better than another.

For the avoidance of doubt, I'm not suggesting annuities are a bad option generally. I'm only making the point that they may not give as much protection against longevity as some people think, especially for someone who has the capability to skillfully manage their financial affairs.

One of the advantages about an annuity is, that once bought, you can just forget about it. With drawdown you have to think about where you are going to save/invest the money etc. And of course those with generous annuity rate guarantees under their policy could be making a mistake if they don't utilise those guarantees.