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

bmm78

SnowMan wrote: »

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 fixed gilts).

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

http://www.fca.org.uk/static/documents/occasional-papers/occasional-paper-5.pdf

The FCA research shows that it isn't a zero-sum game.

"For our baseline profile, annuities that escalate at 5% a year have an MW of 89% while RPI-linked annuities have an MW of 83% (compared to 94% for a level annuity)

...level annuities appear to offer better value for money than 5%-escalating and
inflation linked annuities, potentially because of the risks in forecasting future inflation and the cost of matching inflation-linked assets and liabilities. Another explanation could be that providers face greater risk from escalating annuities compared to level annuities, as payments increase over time and a greater proportion of income is paid further into the future. This increases uncertainty and therefore risk"

Inflation linked annuities are poor value, even in comparison to other annuities. Inflation is obviously an issue to consider, but inflation-linked annuities are a highly inefficient way of protecting against this.

As per the previous post, people should be considering asset-backed annuities, which over time have proven to be a much better way of protecting income against inflation. However, people have to accept a certain amount of risk and fluctuation in income.

bmm78

SnowMan wrote: »

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.

They are a viable niche option in my view. There are people who qualify for a significantly enhanced annuity who do not wish to take any investment risk, but have serious concerns about losing all of their capital due to death in the early years.

Some providers price Value Protection very competitively. Others much less so.

When people are given the figures for Value Protection alongside spousal benefits, they tend to come to the conclusion that the latter option is more valuable to them.

jamesd

telsco wrote: »

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

I'm not sure who you consider to be wealthy but lets pretend that it is a person with £500,000 in their pension pot and for simplicity no other income yet. If they took that in one go they would pay about £208,000 in income tax. Using a common 4% of capital rule for income in retirement, that tax could fund an income of around £8,320 a year. They wouldn't be a huge burden, they would have paid more than enough tax to cover any costs of living that they have above the state pension.

greenglide

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.

The whole point of my post was to accept that annuities are not brilliant at present(!) but that we need "products" to replace them, at leat in part.

My example of "the man in the street" who has never had £50,000 in his life was to question this. People who are financially astute can defer State Pension (but it value is halved for people with an SPa of 6/4/2015 and on and it is no longer inheritable) and can use the other clever options available.

But what are the majority of people supposed to do? Those who are still buying annuities (or were until recently), didnt use the open market option and believed that you had no option but to buy an annuity until last years budget.

Many will sit with large sums in bank accounts, Cash ISAs etc or spend the cash way too quickly and end up skint.

Maybe we need the chancellor to announce "capped drawdown and flexible drawdown" to enable to convert their lump sums into an income stream!

jamesd

greenglide wrote: »

But what are the majority of people supposed to do?

Hope that MSE does a good job of educating people. The audience size is big enough that MSE can make a huge difference, particularly if it's done in association with something like a pamphlet that can be downloaded and printed to give to older people who might not read here normally.

SnowMan

bmm78 wrote: »

Inflation linked annuities are poor value, even in comparison to other annuities. Inflation is obviously an issue to consider, but inflation-linked annuities are a highly inefficient way of protecting against this.

Again for the avoidance of doubt, I should make it clear that I am not suggesting anybody should purchase an index linked annuity in preference to say a fixed increase annuity.

The index linked annuity was chosen because it is the best way to indicate where the break even point occurs. You can do the comparison with fixed increasing annuities, but then you need other assumptions that make the comparison hard to understand.

Of course there is the cost to the guarantees offered of inflation proofing, a cost that may not be worth paying for somebody who has other assets to fall back on should inflation take off.

But the underlying break even is at a high age regardless of whether the comparison is with index linked annuities or fixed increase annuities.

kidmugsy

Pincher wrote: »

Do people really want to live till 90?.

Some eighty-nine year olds do.

kidmugsy

Pincher wrote: »

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.

The "state" can't pay: there are only taxpayers. Why the devil should I pay for your euthanasia and cremation? Pay for it yourself, you cheeky fellow.

kidmugsy

What about 3ANICs, jamesd - do you think they can play a useful role as a substitute for I-L annuities?

Pincher

kidmugsy wrote: »

The "state" can't pay: there are only taxpayers. Why the devil should I pay for your euthanasia and cremation? Pay for it yourself, you cheeky fellow.

Cheeky? I am trying to save you money.


Cost A: Euthanasia £200, Cremation £400


Cost B: State pension until I die, plus health and palliative care.