PPF intervention in Toys R Us

AlanP_2

50x is also an extreme example of a CETV to DB multiplier.

iro

50x has been relatively common recently,

'index linked'?? but we have already seen that the Governement has shifted to CPI from RPI and at any rate only covers inflation at a rate of up to 5%. If we return to the 1970s rate of inflation expect a paupered retirement, there were many assets in the 1970s that gave exceptional protection aginst inflation and gaining control of your pension assets at 50x seems to me at least considering.

hyubh

iro wrote: »

50x has been relatively common recently,

Any stats on that...?

'index linked'?? but we have already seen that the Government has shifted to CPI from RPI

A private sector scheme only switched similarly if its rules aligned its own increases on excess with the government's official measure.

If we return to the 1970s rate of inflation expect a paupered retirement

Back in the 1970s, statutory minimum pension increases didn't exist at all...

there were many assets in the 1970s that gave exceptional protection aginst inflation and gaining control of your pension assets at 50x seems to me at least considering.

Assuming your 'many assets' claim is true, I'm struggling to see the relevance of what may have been a good asset for that purpose in the 1970s to today. You also seem particularly keep on a x50 multiple... does the relevance of the 1970s change if it's only x45, x40, x30...?

kidmugsy

JoeCrystal wrote: »

the period when it is reasonable to transfer out of a DB pension scheme is going to be short. We are in the golden age at the moment when the transfer value is so sky high.

You've just made me realise that a good strategy for some people would be to transfer a DB pension out to a personal pension, and then to get a government job of some kind that would let them build up a new DB pension.

jamesd

JoeCrystal wrote: »

I certainly won't go for 50x or any amount since I value the guaranteed annual pension far higher. If I was offered a choice between £10,000 index-linked annual pension for life once I reach the retirement age or £500,000 SIPP then I would go for index-linked pension.

RPI annuities currently pay 2% at 55 or 2.4% at 60. You could well get a significant income increase by transferring and buying annuities at 50x.

But that's still losing a lot of potential because modern drawdown rules could start out at twice that income with a low chance of falling as low as the annuity.

Since spending tends to drop as people get older and save instead of spending you can also design a more suitable income profile by combining approaches. Maybe a mixture of RPI paying 2% at 55, 3% escalation paying 2.7% and level paying 4.1% for a profile that starts higher and via inflation gradually declines. Some spousal pension options as well but life insurance and state pension deferral might beat the annuity approaches.

A person with shorter life expectancy would get higher numbers than those.

iro

There was the hope that those in reciept of annuities could reverse them and create a liquid secondary market in recycled annuities. This would have attracted providers into the market as well as offering a form of hedging for the liabilities of DB pensions. HMG decided not to follow this path and as a result the annuity market appears to be illiquid and dominated by a small number of firms.

A liquid market in annuities would allow individuals to plan more effectively and alter the mix of risk and return. It would also help planning for inheritance and potentially reduce dependency on the state.

HMG needs to treat individuals like adults capable of managing their own money. Many of us have considerable experience in financial matters from our working years but are not allowed to use this to our advantage.

Perhaps a system of self certification for individuals in which they are required to complete a period of formal training after which they can continue on an 'execution only' basis at low transaction costs are required?

jamesd

A major problem with that idea was price. The people with the greatest incentive to sell are those who have discovered that they have a shorter life expectancy. They also have an incentive not to disclose this. For the purchaser this means that a fair price might be 60% of that spent on the annuity a few weeks earlier.

A person using drawdown has a far more efficient option because they can just draw faster. Or consider an annuity paying a higher income because of their newly reduced life expectancy.

A mixture of plain drawdown, state pension deferral and some gradual annuity buying can be a very good choice to match typical spending profiles while removing the worst case investment risks with the guaranteed income.

iro

An opportunity for a traded annuity future based on a cash settlement price against a 'generic' spot market this would allow short selling and remove the 'secondhand car dealer' asymmetry you mention. Unfortunately the 'spot' market is not sufficiently liquid.

An interesting potential play with 15 year gilts, although these look poor value atm with negative real yields it maybe that this could reverse and a real yield return. Shifting into Gilts would then allow a more leisurely shift into an annuity. A financial website could quote the spread of life adjusted annuity over gilt yield as a measure of value.

Are annuities currently over or under priced to their benchmark?

jamesd

I'm not sure that a generic spot market would help with the information asymmetry problem. Maybe, but I doubt it could ever be big or liquid enough.

Gilts can be used, though today that looks likely to produce capital value losses as interest rates increase.

Whether annuities are over or under priced depends on the benchmark. If gilts are used they'd be about right. If safe withdrawal rate of a mixture of investments, too expensive. Vendors don't have full control due to regulatory and the never pay less constraints. For those who can shop around annuities seem too expensive at the moment even if paying 100% of gilt plus early death cross-subsidy values. Given the constraints imposed on them I don't think annuity vendors have a way out with traditional products. Maybe market-connected products paying 90% success rate safe withdrawal rate and defined income reduction profile would.

iro

Note to myself consider buying 15 year gilts at a GRY of 10%.