Annuities - An Investment?

collieman

Hi everyone - hopefully a simple question to start with but it will be interesting to see what people think. When someone buys an annuity, are they buying an investment?

ffacoffipawb

collieman wrote: »

Hi everyone - hopefully a simple question to start with but it will be interesting to see what people think. When someone buys an annuity, are they buying an investment?

No, they are buying a guaranteed income.

As it cannot currently be sold I wouldn't class it as an investment.

A_Nice_Englishman

Arguably, the purchaser of an annuity is placing a bet that he will live longer than the provider thinks he will.

OldMusicGuy

No they are not. People typically cash in an investment like a pension pot to buy an annuity.

dunstonh

It depends on what type of annuity and what area you are looking at.

For example, advisers have to hold investment permissions to advice on annuities. Some require enhanced pension permissions. Some have nothing to do with pensions. There are investment backed annuities. The FSCS treat it as long-term insurance.

So, maybe some context is needed as you could straddle investment, pension and insurance depending on what angle you are looking at.

kidmugsy

They are essentially buying an insurance - longevity insurance, against running out of money because of living so long.

There's also a joke that it's dementia insurance i.e. that it guarantees an income when the annuitant is too old and muddled to manage her investments to generate an income.

It's maybe also fraud insurance: because it's probably harder to defraud the old of a monthly income than it is to defraud them of a lump of capital.

People who are in drawdown and about to pass, say, age 75 probably ought to consider buying an annuity. But there seem to be two major objections.

(i) A blind, unreasoning hatred of the very idea of an annuity.

(ii) An intellectual inability to understand the point of an annuity. (Seriously, people of low IQ have trouble understanding the argument for one.)


There's also a minor objection, namely that annuities are much more expensive than they were fifteen years ago. This is often prayed in aid by people whose real objection, I suspect, is (i) or (ii). They don't seem to mind buying financial assets that are much more expensive than they were fifteen years ago. Or houses.

zagfles

kidmugsy wrote: »

They are essentially buying an insurance - longevity insurance, against running out of money because of living so long.

There's also a joke that it's dementia insurance i.e. that it guarantees an income when the annuitant is too old and muddled to manage her investments to generate an income.

It's maybe also fraud insurance: because it's probably harder to defraud the old of a monthly income than it is to defraud them of a lump of capital.

People who are in drawdown and about to pass, say, age 75 probably ought to consider buying an annuity. But there seem to be two major objections.

(i) A blind, unreasoning hatred of the very idea of an annuity.

(ii) An intellectual inability to understand the point of an annuity. (Seriously, people of low IQ have trouble understanding the argument for one.)


There's also a minor objection, namely that annuities are much more expensive than they were fifteen years ago. This is often prayed in aid by people whose real objection, I suspect, is (i) or (ii). They don't seem to mind buying financial assets that are much more expensive than they were fifteen years ago. Or houses.

While you might have a point, especially about people who come out with things like "If I die a year after buying the annuity the firm keeps my money!!" as if that's some sort of scandal, annuities are unpopular for lots of good reasons too, such as them being poor value due to low yields on gilts, and even negative yields on index linked gilts. Many/most 75+ year olds will have other sources of guaranteed income such as state pension & DB pensions, so they can take a bit of investment/longevity risk with their DC pot. I doubt I'd ever consider an annuity unless in poor health.

Also anyone who buys a flat (non index linked) annuity and thinks that's a safe option is deluded, particularly in the current political climate. You replace investment risk with inflation risk. I'm more confident of a decent international spread of equities holding their value over the long term than the pound

Linton

I agree that annuities can fulfill a useful role beyond say 75. However that is not mean that they should be used at any price or under all circumstances. Once the cost reaches a level that is unlikely to be recovered within an average persons lifetime their value should at least be reconsidered. It may well be the case that using the money to defer SP early in retirement provides a cheaper and better insurance against extreme old age than buying an annuity later.

There are other good reasons why one may chose not to buy an annuity at 75 - for example, if at 75 one has sufficient other income. Under such circumstances keeping a large lump sum may be far more sensible, eg for potential care home costs or for the estate beneficiaries.

AnotherJoe

collieman wrote: »

Hi everyone - hopefully a simple question to start with but it will be interesting to see what people think. When someone buys an annuity, are they buying an investment?

Not in the traditional sense of the term, no. I am sure you could bend words to make it so, eg "investing in the future", " buying a 100% safe income investment" or whatever, but in the normal meaning of the term, absolutely not.
Whats behind this question. Dull Sunday afternoon?

bostonerimus

There are lots of flavours of annuities. They range form the guaranteed lifetime income annuity which is an insurance produced to variable annuities with incomes dependent on investment returns.

The guaranteed lifetime income is a sensible product in some circumstances. An insurance company takes money from you and other people and pools it together, invests it and guarantees you and all the other annuitants an income for as long as you live. This has the advantage that you get a "mortality credit" on the income where the money of the annuitants that die early goes to pay some of the income of the longer lived members. It has this in common with DB pensions. If such schemes are run for the benefit of the members ,rather than the administrators, I believe they are the most sensible way to fund retirement. They have a place in the portfolios of many older people and also if you are risk averse and can accept the lower income they will probably produce when compared to drawdown.

At the other end of the spectrum are variable annuities that pay income based on investment returns. They often come with promises of minimum income levels, but these are usually expensive and the contracts are complex and hide nasty consequences in bad markets. They are probably best avoided. If you want to be exposed to market returns then get rid of the insurance company middleman and do your own less expensive risk mitigation.

So an annuity can be an investment (quite possibly a very poor one) or it can be more of an insurance product, you need to understand exactly what you are buying and unfortunately people often don't.

Thrugelmir

zagfles wrote: »

such as them being poor value due to low yields on gilts,

Annuities potentially offer a far higher level of income than gilts at the current time.