Annuities - An Investment?

zagfles

Thrugelmir wrote: »

Then I would ask what the difference to a safe withdrawl rate is then? As that consists of capital run down as well.

Why? Why would anyone want to do that? My only point was that annuities (usually) invest in gilts and the main reason for low annuity rates is low gilt yields.

collieman

Wow - that's sparked a debate. Great answers and thanks to everyone. I'll elaborate a bit more. If an annuity is an investment in the true sense then when the person buys the annuity should they be given the standard verbal and written warnings that "investments can go up and down"? If not then it's not an investment? Has anyone bought an annuity and been given this warning? Particularly a "level" annuity where the income stays the same for the rest of the annuitant's life. You get these warnings when contributing to a pension pot because that is an investment at risk of going up and down in value. But when you use the pension pot to buy a level annuity is it an investment?

kidmugsy

A_Nice_Englishman wrote: »

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

No, he's not even placing a bet that he'll live longer than the average annuity-buyer. He's arranging to get a higher annual income-!!!-capital-realisation than he would with gilts, while taking his chances on lifespan.

kidmugsy

bostonerimus wrote: »

Wade Pfau has looked at exactly that scenario......note that he did this after signing up with a US insurance company.

How sensible of the insurance company to try to persuade Pfau to look seriously at annuities.

kidmugsy

kidmugsy wrote: »

He's arranging to get a higher annual income-!!!-capital-realisation than he would with gilts, while taking his chances on lifespan.

Dear God, the prudishness of the MSE software is laughable. It must be American, surely?

dunstonh

f an annuity is an investment in the true sense then when the person buys the annuity should they be given the standard verbal and written warnings that "investments can go up and down"?

Risk warnings should be specific and not generic. So, only if it is an investment backed annuity would you expect that warning.

Has anyone bought an annuity and been given this warning?

They probably have in the old days when generic warnings were more common. It can also depend on the distribution channel as advised sales have different requirements to non-advised sales (more likely to get generic warnings on non-advised sales).

Thrugelmir

zagfles wrote: »

Why? Why would anyone want to do that? My only point was that annuities (usually) invest in gilts and the main reason for low annuity rates is low gilt yields.

I'm well off wishing to retire. Though monitor annuity rates on a quarterly basis to follow the trends. Currently I could swop my SIPP for a near 6% yield annuity (guaranteed for 10 years). There's no where to my knowledge that I can obtain a guaranteed fixed income of that level by investing in either Gilts or Blue Chip Corporate bonds. By waiting in time then the yield can only increase, aided of course by the envitable future rise in interest rates.

(Appreciate that the income has no inflation index linking).

bostonerimus

Thrugelmir wrote: »

I'm well off wishing to retire. Though monitor annuity rates on a quarterly basis to follow the trends. Currently I could swop my SIPP for a near 6% yield annuity (guaranteed for 10 years). There's no where to my knowledge that I can obtain a guaranteed fixed income of that level by investing in either Gilts or Blue Chip Corporate bonds. By waiting in time then the yield can only increase, aided of course by the envitable future rise in interest rates.

(Appreciate that the income has no inflation index linking).

So when you say yield do you mean the ratio of your annual income to the lump sum to buy the annuity....also what age are you....70ish?

Thrugelmir

bostonerimus wrote: »

So when you say yield do you mean the ratio of your annual income to the lump sum to buy the annuity....also what age are you....70ish?

Yes and far from it.

bostonerimus

Thrugelmir wrote: »

Yes and far from it.

If you can get something significantly better than a commercial annuity then I can see the logic. Right now the best I see on the web is something like 6% for a 70 year old and at that rate most people would be better off just putting the money in a saving bond ladder getting 2% interest.

When I retired I bought into a DB pension (basically a lifetime annuity) and for $280k I got a $20k inflation linked annual income starting at age 55 so it was a good deal. I think the hardest thing to do is for people to gauge the value if a lifetime income as very few people know how long they have to live.....so you've just got to go with the averages.