'Annuities are poor value' - what do they know that we don't?

NottinghamKnight

itwasntme001 said:

It is crazy that the market thinks its ok to lose 50% in real terms on an index linked gilt if inflation turns out to be as expected, but that is the crazy world we live in today.

Obviously people buy it as they expect inflation to rise by more for buy and hold OR expect real yields to fall for trading.

Or institutional investors are effectively forced to buy them and the balance of demand and supply have ended up with the current pricing, not arguing that it'snot a crazy world though.  

itwasntme001

At least the 50% is in real terms and not just nominal hey?

JohnWinder

michaels said:

I was just looking on cfiresim, my current pot plus SP entitlement gives me a 100% 'safe' annual income for 45 years of retirement of £34k - in some periods the pot falls as low 6x annual withdrawal after only 15 years - anyone fancy continuing withdrawals at the historically safe rate when you are down to only 6 years cover left at age 65?

Your original question was a good one, and the answers seem comprehensive.

The, 'a', problem with SWR, as already mentioned, is it simplifies the complex matter of meeting varying needs from an asset base with unstable values. One ought to explore flexible withdrawal methods to give more comfort than a single SWR figure which is nonetheless useful to provide an overall summary picture of future spending.

This is a good series from a bloke a lot smarter than most of us: https://earlyretirementnow.com/safe-withdrawal-rate-series/

You never have to risk running out of money using withdrawal, but you might be eating cat food some years to get there. Here's a spreadsheet to guarantee that:

https://www.bogleheads.org/forum/viewtopic.php?t=120430

And amortization based withdrawal:

https://www.bogleheads.org/wiki/Amortization_based_withdrawal

Silvertabby

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Deleted_User said:

zagfles said:

michaels said:

Deleted_User said:

michaels said:

Deleted_User said:

1. “No failure SWR” does not exist. Its a misnomer.  There is a conceptual problem with defining a constant withdrawal rate from an inherently volatile asset like stocks. SWR is based on a portfolio of mostly stocks.  

2. SWR is typically calculated based on past 100 years’ worth of data for the next 30 years. Annuity has no expiry. The main risk for the vendor is that you will live way too long. 

3. You pay for buying an insurance policy. Thats what annuity is.  A company is pooling risks and providing you with an insurance product. They take a cut. 

4. You should really compare annuity rates to coupons on long term government bonds.  Thats a truly safe product, up to the point of expiry.  Makes annuities look pretty good, huh? In fact, one of the strategies in this environment involves a 60 year old buying an annuity with a portion of your portfolio and spending the proceeds to buy bonds. You gain vs just holding bonds right away if you live to 75 or so. 

Part of what the markets do is pool and share risk, thus we would expect an annuity provider to be able to provide a higher return that simply buying govt bonds to cover the likely distribution of policy holder longevities.

Seems like the big discrepancy is telling us that SWRs based on historical returns are actually higher than current market consensus for probable future returns and if you believe in efficient markets you are basically betting on the market being wrong if you plump for a 'historically conservative' 3.25% SWR for a retirement that might last more than 30 years.

You are discovering that SWR does not exist. Otherwise insurance companies selling annuities would have used it.  Instead they use long term government bonds because SWR isn’t for real. 

So given an annuity pools longevity risk, despite the provider profit margin it is actually probably better value for an individual than drawdown - is that the conclusion I should be drawing?

Yes, if you want a guaranteed income for life, then index linked annuities are what you should go for. As above, there's no such thing as a "SWR" from a drawdown pension. There's only speculation, usually based on the assumption that the future will be similar to the past.

Personally I'm willing to tolerate some financial risk, after all we tolerate risk in virtually every other walk of life, if I can live with a 1 in 2 chance of getting cancer I can certainly live with a chance my pension might be less than I'd hoped for. Like all things you weigh up the risk and cost/benefit of your options.

Cancer is something we can’t control so its different.  Having a pension “less than hoped” isn’t a problem. The main risk is outliving your money.  Not a pleasant scenario. Even a 5% probability seems unacceptable to me. 

Agreed that outliving your money is not the outcome you desire. But assuming that monitor your retirement journey periodically (e.g. annually), you should get plenty of warning that adjustments might need to be made. Taking the worst case outcome for a random case study....someone retiring in 1968 at aged 60 would be hit early in retirement by the prolonged market falls and lumpy inflation in the 1970s (in sharp contrast to our Covid discussion), and withdrawals may need to be adjusted. 



Assuming spending was cut by 5% at this point (aged 66, so for example an inflation-adjusted £40k is reduced to £38k going forwards), the eventual outcome is a lot more favourable. 

How many people in 1968 could afford early retirement?  My late father spent 8 years in the British Army in Palestine between 1940 and 1948. Never had a DB pension scheme despite a successfull career post war.  Never recovered those best earning years of his life that he lost. Ended up working part time well into retirement. As no family inheritances to speak of.  

I'm not sure re your answer of 1968 and early retirement, but the age chosen was just to demonstrate the impact a small adjustment early on in retirement can have on plan sustainability. 
Re your father, did he get nothing from the Army in terms of pension? My Grandpa (RIP) was in the Army around the same time but I've no idea what he got.

Pre April 1975 only those who served for 22 years or more received Armed Forces pensions.

Silvertabby

Just to add my tuppence ha'penny.

Those of you who have thus far commented on the pros and cons of annuities or drawdown sound very sensible.  However, not everyone has the mindset to cope with a large amount of money.

I had many conversations with LGPS members (both serving and deferred) who wanted to transfer their benefits to a personal pension in order to take advantage of the new 'pension freedoms'.  Not one of them claimed that they had the knowledge needed to invest the money and then drawdown at a more favourable rate than the pension offered by the LGPS.  Instead, they seemed to view this on par with a lottery win - to be spent on new kitchens, cars, holidays, big wedding etc.

mark55man

Thank you very much for a fascinating read on an unloved topic. 

As it happens a close friend has just made this exact choice taking the opportunity of going for an index lined annuity at 60 (due to company pension DB to DC changes) with a view to investing the income until his planned retirement in 5 years at 65 + taking 25% PCLS to clear his mortgage and give him a comfortable emergency fund as his role is vulnerable.  I will suggest the bond investment technique to him as he is looking to build up a DC pot with the freed up outgoings.  He and his partner will now go into retirement with a significant %age of his current income guaranteed and a choice in a few years of using the DC pot to retire slightly earlier or retiring later with an enhanced income.

I wasn't entirely convinced he made the right choice, but at a multiple of 40 for the transfer and 5 years extra income from taking the annuity from now (at a better rate than taking his DB early) he has transformed his financial position and I find it hard to fault his logic, even if it is probably the last decision I would have made.  

zagfles

Silvertabby said:

Just to add my tuppence ha'penny.

Those of you who have thus far commented on the pros and cons of annuities or drawdown sound very sensible.  However, not everyone has the mindset to cope with a large amount of money.

I had many conversations with LGPS members (both serving and deferred) who wanted to transfer their benefits to a personal pension in order to take advantage of the new 'pension freedoms'.  Not one of them claimed that they had the knowledge needed to invest the money and then drawdown at a more favourable rate than the pension offered by the LGPS.  Instead, they seemed to view this on par with a lottery win - to be spent on new kitchens, cars, holidays, big wedding etc.

Indeed - some people can't even cope with managing a month's worth of money, let alone a lifetime's, which is why we get continual stories of "starving children" in a country with one of the most generous levels of welfare in the world for low income families.

dunstonh

As it happens a close friend has just made this exact choice taking the opportunity of going for an index lined annuity at 60 (due to company pension DB to DC changes) with a view to investing the income until his planned retirement in 5 years at 65 + taking 25% PCLS to clear his mortgage and give him a comfortable emergency fund as his role is vulnerable. 

That scenario leads to a lot of questions as to why someone would commence an annuity income whilst they are still working.

I wasn't entirely convinced he made the right choice, but at a multiple of 40 for the transfer and 5 years extra income from taking the annuity from now (at a better rate than taking his DB early) he has transformed his financial position and I find it hard to fault his logic, even if it is probably the last decision I would have made.  

The DB transfer may be fair enough but taking the annuity now is the strange one.  He gets 5 extra years payments that he doesn't need at a lower annuity rate and misses out on 5 years of growth.

MK62

Silvertabby said:

Just to add my tuppence ha'penny.

Those of you who have thus far commented on the pros and cons of annuities or drawdown sound very sensible.  However, not everyone has the mindset to cope with a large amount of money.

I had many conversations with LGPS members (both serving and deferred) who wanted to transfer their benefits to a personal pension in order to take advantage of the new 'pension freedoms'.  Not one of them claimed that they had the knowledge needed to invest the money and then drawdown at a more favourable rate than the pension offered by the LGPS.  Instead, they seemed to view this on par with a lottery win - to be spent on new kitchens, cars, holidays, big wedding etc.

That's fair enough, but equally I imagine none were looking at buying an annuity with their transferred pension.......someone about to choose between drawdown and annuity with a DC pension, already has a pot of money, and are already managing it, or else delegating that to a third party, such as an IFA.

Granted, there's something of a mindset shift required for the drawdown phase, and those who really don't fancy it can always go for annuity if they so wish......but that's pretty much the choices on the table for them.....no index linked DB lifetime pension is on offer (I wish it was tbh... ).

mark55man

dunstonh said:

As it happens a close friend has just made this exact choice taking the opportunity of going for an index lined annuity at 60 (due to company pension DB to DC changes) with a view to investing the income until his planned retirement in 5 years at 65 + taking 25% PCLS to clear his mortgage and give him a comfortable emergency fund as his role is vulnerable. 

That scenario leads to a lot of questions as to why someone would commence an annuity income whilst they are still working.

I wasn't entirely convinced he made the right choice, but at a multiple of 40 for the transfer and 5 years extra income from taking the annuity from now (at a better rate than taking his DB early) he has transformed his financial position and I find it hard to fault his logic, even if it is probably the last decision I would have made.  

The DB transfer may be fair enough but taking the annuity now is the strange one.  He gets 5 extra years payments that he doesn't need at a lower annuity rate and misses out on 5 years of growth.

I agree, which is why I was suggesting if he did transfer, he should go the whole hog and look to have the transferred funds managed by an IFA - taking initial advice and ongoing management services, with an initial view to annuitise at the point of retirement.  However, as per other posts above I think the amount of money (just over 250K) scared him, and he is not a risk-minded person.  Plus, I think the lump sum will allow him to advance home improvements and possible sale which I know would be life changing for them .  This plus the certainty of it all were the clinchers. 

The offer from his employer to enable all this (and we know they will benefit from the transfer in terms of reduced liabilities) was on quite an aggressive timescale, but the tone of the advice from the hired IFA (some of which he talked through with me) did seem some well considered - it just didn't feel that independent not in terms of product range, but in terms of whether it was the company's interest  or his interest.  However he is happy and secure now, and he regards that as not a bad outcome. 

It did make me consider my own plans - I have a single largish DB which I have been tracking CETV for, but remain to decide if I would do anything other than toy with the idea, however following quite large increases in the last two CETV valuations, plus a good likelihood of a minor impaired health premium to an annuity - this thread has been interesting in a new direction sort of way