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

dunstonh

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. 

He could still have taken the tax free cash and not bought the annuity.

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 has often been said that the adviser is employed by the company to achieve the company objective.  They cant give bad advice but it will be limited somewhat.   It got him out of the scheme but I cant help feel that he made the wrong decision to buy an index linked annuity at age 60 when he didn't need it.  Do you know if he sought advice on the annuity purchase?

[Deleted User]

mark55man said:

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.  

This strategy is described by Professor Pfau in his recent book “Safety First Retirement Planning”. 

https://www.amazon.com/dp/1945640065/ref=as_li_ss_tl?keywords=wade+pfau&qid=1569931933&sr=8-8&linkCode=sl1&tag=pensretiplana-20&linkId=47663675b810f60eebea759a59fc922a&language=en_US

https://www.theamericancollege.edu/our-people/faculty/wade-pfau

This could work for someone who has enough money (aka “won the game”) and does not want the uncertainty of stocks.  I don’t know enough about it but it is certainly a legitimate strategy. 

The devil is always in the detail.  Like is getting an index linked annuity really a good value vs a fixed annuity, particularly if you are reinvesting the proceeds? 

mark55man

Mordko, Dunstonh

I agree with both of you and suggested both taking the lump free sum and then investing, or if he was going annuity then to take fixed level, which the illustrations themselves indicated would be superior excepting unusual inflation or living beyond 90.  But he did not want either. 

At a cost to himself of having less money later he sees himself as having bought flexibility and surety and an opportunity to move his plans forward - which is not entirely wrong, and the price he paid for it in terms of CETV was one he would never have steeled himself to take (and I think we would all have applauded that decision) so the true comparison is with the original DB  vs the annuity income stream - and he was comfortable with those comparisons

[Deleted User]

And he could be right for his particular circumstances.  Very hard to make a generic recommendation in such cases. One of the big issues for me is the risk associated with the long term solvency of the company offering DB. And will the taxpayer back them up when push comes to shove? Then there is the question of all the extra benefits built within his particular DB plan. 

I think annuities are out of fashion and there will be circumstances for which they are appropriate. 

ukdw

This strategy is described by Professor Pfau in his recent book “Safety First Retirement Planning”. 

https://www.amazon.com/dp/1945640065/ref=as_li_ss_tl?keywords=wade+pfau&qid=1569931933&sr=8-8&linkCode=sl1&tag=pensretiplana-20&linkId=47663675b810f60eebea759a59fc922a&language=en_US

Also available on Kindle Unlimited on UK amazon

https://smile.amazon.co.uk/Safety-First-Retirement-Planning-Integrated-Worry-Free/dp/1945640065

Thrugelmir

Deleted_User said:

One of the big issues for me is the risk associated with the long term solvency of the company offering DB. And will the taxpayer back them up when push comes to shove? 

All changed with the actions of Robert Maxwell some decades ago. 

https://www.ppf.co.uk/

jamesd

JohnWinder said:

This is a good series from a bloke a lot smarter than most of us: 

Maybe, but use a lot of caution because they thoroughly misrepresented and/or misunderstood Guyton-Klinger when they wrote about it. What they actually used was their custom modification of something more like Guyton's original idea than Guyton-Klinger and the issues they describe are because of what they got wrong. Don't use what they describe instead of real Guyton-Klinger.

jamesd

Thrugelmir said:

Deleted_User said:

One of the big issues for me is the risk associated with the long term solvency of the company offering DB. And will the taxpayer back them up when push comes to shove? 

All changed with the actions of Robert Maxwell some decades ago. 

https://www.ppf.co.uk/

No, the taxpayer doesn't and probably won't back them up, except for public sector schemes.

What the PPF does to succeed is cut benefits for those not yet at scheme retirement age and also cut benefits to the legal minimum, notably for inflation increases.

It's an area where the guaranteed aspect of DB compared to drawdown is actually weaker than usually claimed. It's still far better than getting nothing and has been a major benefit to DB scheme members.

The BoE or Treasury will lend the PPF (and FSCS) the money they need to cover short to medium term needs.

mark55man

ukdw said:

This strategy is described by Professor Pfau in his recent book “Safety First Retirement Planning”. 

https://www.amazon.com/dp/1945640065/ref=as_li_ss_tl?keywords=wade+pfau&qid=1569931933&sr=8-8&linkCode=sl1&tag=pensretiplana-20&linkId=47663675b810f60eebea759a59fc922a&language=en_US

Also available on Kindle Unlimited on UK amazon

https://smile.amazon.co.uk/Safety-First-Retirement-Planning-Integrated-Worry-Free/dp/1945640065

Subscribed to unlimited and had a read - really quite eye opening and readable, but then after chapter 5 and the 7th variety of annuity it became somewhat eye closing, but that's my bad for trying to read it all in one sitting after a long day. 

It has increased my willingness to consider this safety-first logic, but also to take comfort that in my current position (full SP and slightly larger DB) is pretty safety first already - so I can maybe relax about some of the higher risk profile investments in my DC funds 

jamesd

michaels said:

Historically conservative 100% no failure SWRs are considerably higher than annuity rates even with durations well above the average life expectancy.
Why should this be. 

Guarantees and regulations.

An annuity company is required to invest in such a way that it is almost certain to be able to meet its obligations. That normally means liability matching with gilts and index-linked gilts of maturities matching the obligations. Since those are traditionally regarded as perfectly safe there is no investment risk premium available.

There is a subsidy available from those who die early to those who don't but annuities are normally sold at young ages where this effect is minimal. It starts to become really significant between age 75-85 with normal life expectancy. It's why I'll fairly often suggest some annuitisation in that age range, after the initial opportunity of state pension deferral becomes less efficient.

Those in drawdown do have flexibility to vary income and do normally invest with risk premiums. SWRs with only gilts won't normally look good but that's what you must use if trying to emulate annuity properties.

Defined benefit schemes have some similar but less severe constraints, at least while the sponsoring company is healthy and able to be regarded as a liability taking backstop.