Drawdown Strategy inc Deferred Annuity?

DairyQueen

I am in the process of digesting this academic paper (:eek:). The authors have tested a drawdown strategy that assumes a 20-year drawdown period and includes the purchase of a deferred annuity (for longevity protection).

The 'A' word has acquired narrow definitions in mainstream UK retirement lexicon (e.g. standard annuity purchased on retirement, short-term deferred annuity to, say, protect those entering care in old age, etc.). I (for one) have therefore parked 'annuities' as a poor or inappropriate option in my retirement planning - at least for now.

So I was pretty surprised to see a reference to long-term, deferred annuities in the above-mentioned paper. A quick google suggests that these products are commonly available in the USA, presumably as drawdown has been de rigeur across the pond for so long. My quick research suggests that long-term deferred annuities may be available in the UK but, perhaps, few companies offer them and, possibly, only do so via IFAs.

I am still in the process of pre-retirement financial planning (we are now within 5 years of beginning drawdown) and a long-term deferred annuity may be useful in our specific circumstances. Does anyone know anything about this type of annuity? Are they available in the UK? Under what circumstances would you consider them? Are they generally poor value? (i.e. cost outweighs benefit in most cases). Do different products offer more/less exposure to equities? This kind of info. would be very helpful and much appreciated.

Oh, and for those minded to trawl through the paper, I would love to hear your views regarding the specific drawdown strategy researched by the academics.

michaels

Not sure if this is still the case but in the past I think the state pension deferral was the best value 'deferred annuity' option - we need jamesd to confirm.

ams25

If your bedtime reading includes academic papers like this then I definitely recommend Wade Pfau's book "How much to spend on Retirement"! You will probably love it

https://www.amazon.co.uk/How-Much-Spend-Retirement-Investment-Based/dp/1945640022/ref=la_B01KP4I5O8_1_1?s=books&ie=UTF8&qid=1517482957&sr=1-1 (read it for free with kindle unlimited...)

He does talk about using single premium immediate lifetime annuities as a viable part of the retirement funding mix if you have no or insufficient other "secure" funds such as a Defined Benefit pension, state pension (social security in the US), rental income etc. One suggestion is to build a ladder of these as you get older... so rather than use your entire pot to buy an annuity in the traditional way on retirement (poor value), you buy them in stages so you get better value as you get older. Deferred annuities could also be part of this mix.. perhaps aligned to long term care needs.

He argues that you want to aim to cover basic living expenses by safer income sources such as these and then use investment returns for the more discretionary spending. That way you are less exposed in a down market period and can cut back spending more easily.

Personally this is how I see my DB and nSP working (should cover c.50% of my number) and then using a safe/variable drawdown rate to provide the more discretionary spending with a cash buffer to smooth the returns further. (however I am 7 years away from the DB and 14 years from nSP 14 :eek: so in the meantime (as i am early retired or something) I need to bridge a lengthy gap...)

I hope this thread is not now deleted..;)

dunstonh

The new state pension deferral terms are about half the old ones. 1% for every 9 weeks given up. Breakeven point is much further along.

It can still be good if your health is fine and you were comparing against an in-house annuity or low value annuity (annuity rates tend to get higher, the more you have).

presumably as drawdown has been de rigeur across the pond for so long.

Drawdown is nothing new here either. A number of US companies tried to enter the UK market 15 or so years ago with their third way products. Nearly all have closed having failed to make an impact. Some were even considered to have retailed products that were structurally bad. Most were high charges.

My quick research suggests that long-term deferred annuities may be available in the UK but, perhaps, few companies offer them and, possibly, only do so via IFAs.

The range of options available via an IFA are greater than DIY. That is inevitable. The DIY market focuses on more conventional drawdown options. The niche options have too small a market to make it cost effective to retail direct to consumer (which involves further regulatory requirements, fee blocks for levies, increased staff etc as well as increased compliance risk)

The 'A' word has acquired narrow definitions in mainstream UK retirement lexicon (e.g. standard annuity purchased on retirement, short-term deferred annuity to, say, protect those entering care in old age, etc.). I (for one) have therefore parked 'annuities' as a poor or inappropriate option in my retirement planning - at least for now.

There are more to annuities than just those. Perhaps the problem is the way the media demonised lifetime annuities a few years ago. However, the pension freedoms also changed the rules on annuities and what they could offer. That got no media coverage.

OldMusicGuy

I second ams25 in that you should look into Pfau's research, you will find it in line with your thinking. I think I posted a link to this article on your disappeared thread, so here it is again in case you didn't see it:
https://www.forbes.com/sites/wadepfau/2017/04/12/4-approaches-to-managing-sequence-of-returns-risk-in-retirement/#443b11b16fcf

Malthusian

dunstonh wrote: »

The niche options have too small a market to make it cost effective to retail direct to consumer (which involves further regulatory requirements, fee blocks for levies, increased staff etc as well as increased compliance risk)

That, and that many of the niche options are so godawful that the insurer needs the human shield of an adviser to put between itself and the Ombudsman/regulator. Nobody wants to enter a market where you sell a long-term investment product to a few thousand people and a few years later they all want their money back because they would have been better off either with a conventional annuity or an income drawdown plan. If however you can get advisers to do the flogging so that they get the complaints and you get to keep your money, you're in business.

However, not enough advisers were willing to sell these products so as Dunston says they have mostly withdrawn from the market.

It is difficult to say whether long-term deferred annuities would be a good deal or not, given that they aren't available, but based on the rates offered by current fixed-term annuities (the same thing only without the deferral period) I am virtually certain they would be very bad value.

For most people in the UK, the State Pension takes away a great deal of the need for a guaranteed income to meet core expenditure needs. They therefore have less need for products like deferred annuities. If you live in a system which doesn't provide so much guaranteed, non-means-tested income for life, then you are more likely to want to use some of your pension savings to provide that.

DairyQueen

ams25 wrote: »

I

I hope this thread is not now deleted..;)

I will definitely take your recommendation on my bedtime reading . Seems that this thread may have missed the spammer's attention but, then again, that was Saturday night and I guess he/she/they may be sober during the week.

DairyQueen

dunstonh wrote: »

T
There are more to annuities than just those. Perhaps the problem is the way the media demonised lifetime annuities a few years ago. However, the pension freedoms also changed the rules on annuities and what they could offer. That got no media coverage.

I'm not sure that 'demonised' is the right word but the media certainly focuses on annuities as poor value in the current economic climate, and for the foreseeable.

I'm thinking that now be a good time to engage the services of an IFA.

DairyQueen

OldMusicGuy wrote: »

I second ams25 in that you should look into Pfau's research, you will find it in line with your thinking. I think I posted a link to this article on your disappeared thread, so here it is again in case you didn't see it:
https://www.forbes.com/sites/wadepfau/2017/04/12/4-approaches-to-managing-sequence-of-returns-risk-in-retirement/#443b11b16fcf

Unfortunately your helpful link posted on the previous thread seems to have disappeared into the ether courtesy of the spammer/s. Thank you for posting again.

DairyQueen

My (deleted by scammers) thread noted that I have impaired life expectancy and am unlikely to outlive OH. However, the possibility remains that I may do so. It's this scenario that I'm trying to protect against. OH has a generous DB plus DCs.and full SP. I have only the full SP as guaranteed income but have a reasonable SIPP. If the odds go against us, and I outlive OH, then my SIPP moves from a source of discretionary spends to non-discretionary. I will receive 50% of his DB but I would need extra income to maintain the status quo. I am therefore keen to ensure that my drawdown rate doesn't exhaust the SIPP too quickly.

A deferred long-term annuity seems like an option to achieve the protection I may (just 'may') need. OH will be fine if the odds pan-out.

Given that it seems this kind of annuity is not available in the UK I'm querying the validity of the academic paper. Their research was designed for a UK scenario so why they have used factors that don't exist in our market beats me.

sandsy

Deferred annuities traditionally involve the company issuing them to provide some form of guarantee on the level of income. Guarantees really aren’t flavour of the month with insurance companies these days. The assets they need to invest in to provide a decent level of guarantee have relatively high cost which many consumers aren’t prepared to pay. MetLife offered guaranteed products in the retirement space until a few months ago and the guarantees didn’t come cheap. Also new regulations (Solvency II) from Europe increased the amount of capital companies have to hold when they have guaranteed business on their books.