Drawdown Strategy inc Deferred Annuity?

DairyQueen

sandsy: Thank you for the explanation re: the absence of many types of annuity from the UK market (inc long-term deferred annuities.) Given this situation, and the credentials of the academics who authored the paper referenced in my OP, and that the paper was written recently, I am even more surprised at the assumption they made when they tested their theory on safe withdrawal rates The words 'pointless' and 'exercise' spring to mind.

Ah well.... back to the drawing board.

OldMusicGuy

DairyQueen wrote: »

OH has a generous DB plus DCs.and full SP. I have only the full SP as guaranteed income but have a reasonable SIPP.

Our situation is somewhat similar to yours. I am forecast to get SP of 10,500, have no DB pensions but a big DC pot. My wife will get SP and DBs of around 16.000 in total. Together we have a reasonable base of core income once we reach SP age in 6 years time, but if she goes first I will be in a more challenging situation than vice versa. If that happens I can see the place of annuities in building an income floor for me. But hopefully that won't be until I am older (70 plus) so the rates should be a bit better.

Malthusian

DairyQueen wrote: »

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.

Anyone can devise an investment product within the sandbox environment of an academic paper and say that it would deliver better outcomes for investors, but if an insurer can't bring it to market after accounting for the cost of distribution, marketing, and getting advisers to put themselves in the way of any complaints, it's literally of academic interest only.

I am reminded of a few years ago when the Centre for Policy Studies invented the solution to all pension freedoms problems; they proposed that people should automatically be made to purchase an annuity at 55 (unless they opted out), but that they should still be able to get their money out of said annuity. This, of course, would have considerably worse rates than current lifetime annuities, because the insurer would have to keep funds liquid to ensure they could meet withdrawal requests and there would be very little mortality cross-subsidy. But this wasn't a problem the CPS dwelt on. They're the ideas men, it's other people's job to worry about the fiddling small details. It's called a think tank, not a do tank.

At the moment a 65 year old can get an immediate 20-year single-life fixed term annuity paying 1.5% per annum with RPI linking, returning just under the original capital at the end of 20 years. That original capital would of course be worth less than half of what it used to be at the end of 20 years. But we have to assume that somebody buying this annuity would want at least the original capital back at the end of 20 years, in order to buy a lifetime annuity or otherwise meet their needs from 85.

What about if you didn't wait until 65 to buy that annuity, but bought a deferred annuity at 60 which would be deferred for 5 years and then pay income for 20 years? What extra return could the insurer generate in that 5 year period to boost the income? Basically b

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all, because the insurer is not able to guarantee investment growth over a 5 year period. They would have to invest your money in gilts, and a 5-year gilt currently yields 1.13% minus costs. Of course with pooling and the fact that you can't change your mind after 5 years, the return might be a bit higher.

We can in fact imagine what an annuity deferred for 5 years and paying out for 20 would look like by looking at the rates for a 5 year fixed rate annuity that pays no income at all. If you invest £100,000 in a 5-year fixed rate annuity with no income, you get £110,978 back after 5 years. If you invest £110,978 in a 20-year annuity paying RPI-linked income which returns the original £100,000 at the end, you get just over £1,800 per annum.

So the market suggests that a deferred annuity bought at 60, deferred for five years and paying out for 20, returning your original capital at 85 to meet your further needs, would pay out inflation-linked income of around 1.8% during the payment term. (If you did this in reality, at the end of the five-year nil-income annuity you would be dependent on annuity rates in 2023, not what they are now. But this is all we have to go on.)

By contrast if you just bought a lifetime annuity at 65 you would currently get 3% per annum index-linked for life.

Fixed term annuities may well make sense in other countries where you don't get so much guaranteed non-means-tested income for life via the State Pension and insurers are not required by law to invest in long-term UK gilts, restricting the potential rate. In the UK they are a very, very niche option.

DairyQueen

OldMusicGuy wrote: »

Our situation is somewhat similar to yours. I am forecast to get SP of 10,500, have no DB pensions but a big DC pot. My wife will get SP and DBs of around 16.000 in total. Together we have a reasonable base of core income once we reach SP age in 6 years time, but if she goes first I will be in a more challenging situation than vice versa. If that happens I can see the place of annuities in building an income floor for me. But hopefully that won't be until I am older (70 plus) so the rates should be a bit better.

Yes, definitely a similar situation to us. Having researched a little, and listened to the expert views here, I am beginning to appreciate the value of annuities. I now understand the factors that effect the commercial viability of various types of these products across economic cycles and markets, and why long-term deferred annuities simply don't cut the mustard in the UK right now.

We are pretty much the same age as you two. OH will probably defer taking his DB (NRD in two years) for a couple of extra years as it will increase the value by a sum that's worth the wait (with a proportionate increase in the widow's benefit). He is 5 years away from SP and I have 7 years to go. Will your OH have the option to defer taking the DB? If so, is that something worth considering?

The conundrum is how to drawdown from the SIPP and DCs.

Hope you don't mind me asking but do you have a specific aim/strategy for your non-guaranteed pot? and what investment approach have you chosen? I ask as your circumstances are very similar to mine. Others' views and experiences are really helpful.

DairyQueen

Malthusian wrote: »

It's called a think tank, not a do tank.

I will be quoting that pithy oneliner :T

Thank you for a great reply.

Malthusian wrote: »

At the moment a 65 year old can get an immediate 20-year single-life fixed term annuity paying 1.5% per annum with RPI linking, returning just under the original capital at the end of 20 years.

Forgive me for asking a specific question along these lines but could you give an indication of the kind of return currently available for a 20-year, single-life, fixed-term annuity (with RPI) that returns zero capital at the end of the period? (immediate start for a 60-year old) compared to a lifetime annuity.[/QUOTE]

kidmugsy

DairyQueen wrote: »

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..

Have you considered insurance as protection against that? If the chance of its occurring is remote the insurance should be cheap.

By the way, fans of Wade Pfau might also enjoy Dirk Cotton.
http://www.theretirementcafe.com

DairyQueen

kidmugsy wrote: »

Have you considered insurance as protection against that? If the chance of its occurring is remote the insurance should be cheap.

By the way, fans of Wade Pfau might also enjoy Dirk Cotton.
http://www.theretirementcafe.com

Thanks very much for that. I hadn't considered life insurance so that's a great tip. I'll also take a look at Dirk Cotton. I've read a little about Pfau's contribution to the SWR debate. What he says about the prospect of (lower) market returns over the next decade resonates with me. I also think that a variable withdrawal rate is the sensible way forward, but I'm still researching.

dunstonh

What he says about the prospect of (lower) market returns over the next decade resonates with me.

Seeing as the last decade is about to see the credit crunch drop off, that is pretty inevitable. That is unless a crash happens in the next 12 months.

sandsy

Just be aware that with impaired life expectancy, life insurance could work out expensive for you. I'm presuming you have a condition which will need to be declared and potentially manually underwritten.

kidmugsy

sandsy wrote: »

Just be aware that with impaired life expectancy, life insurance could work out expensive for you. I'm presuming you have a condition which will need to be declared and potentially manually underwritten.

Beside the point. What she wants to insure against is her surviving her OH. So the iller she is, and the healthier he is, the cheaper it will be.