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

Thrugelmir

jamesd said:

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/

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

At the end of the day the source of  the majority Government revenue comes from taxpayers. In one form or another. Whether it's direct or indirect. 

Sailtheworld

michaels said:

So why are annuities so expensive?

Because they tend to be purchased by people at the less financially savvy end of the bell curve.

BritishInvestor

Sailtheworld said:

michaels said:

So why are annuities so expensive?

Because they tend to be purchased by people at the less financially savvy end of the bell curve.

What makes you say that?

garmeg

Sailtheworld said:

michaels said:

So why are annuities so expensive?

Because they tend to be purchased by people at the less financially savvy end of the bell curve.

No. They are expensive because gilt yields are very low and annuity providers will be investing (almost all of) the purchase monies in gilts of appropriate term to match the profile of their liabilities.

zagfles

Sailtheworld said:

michaels said:

So why are annuities so expensive?

Because they tend to be purchased by people at the less financially savvy end of the bell curve.

No they aren't. Those people will look at the pension value or CETV and say, duh, that's a big number, definitely better than my annual DB pension, I'll transfer it and I'll be mega rich. Generally, financially clueless people will underestimate how much a guaranteed income will cost, and they'd think it a no-brainer to take a £million lump sum over a £30k pa inflation linked pension. So they'd avoid buying an annuity, as they think rates are so low because they're being ripped off by insurance companies in their fancy buildings etc rather than very low gilt yields, negative in the case of index linked.

Sailtheworld

garmeg said:

Sailtheworld said:

michaels said:

So why are annuities so expensive?

Because they tend to be purchased by people at the less financially savvy end of the bell curve.

No. They are expensive because gilt yields are very low and annuity providers will be investing (almost all of) the purchase monies in gilts of appropriate term to match the profile of their liabilities.

You go through a working life saving and taking investment risk but then, at a flick of a switch, decide to spend the next 30 years living on today's gilt yield just because that's how it has always been done?

The financially savvy tend to try and avoid expensive things. They're also aware that annuity providers aren't acting altruistically.

At best people are buying through gritted teeth and at worst are forced buyers because they're losing their faculties and can no longer manage their affairs. Not a good environment in which to expect good value for money.

Sailtheworld

zagfles said:

Sailtheworld said:

michaels said:

So why are annuities so expensive?

Because they tend to be purchased by people at the less financially savvy end of the bell curve.

No they aren't. Those people will look at the pension value or CETV and say, duh, that's a big number, definitely better than my annual DB pension, I'll transfer it and I'll be mega rich. Generally, financially clueless people will underestimate how much a guaranteed income will cost, and they'd think it a no-brainer to take a £million lump sum over a £30k pa inflation linked pension. So they'd avoid buying an annuity, as they think rates are so low because they're being ripped off by insurance companies in their fancy buildings etc rather than very low gilt yields, negative in the case of index linked.

People doing as you describe are at the less financially savvy end of the bell curve too. They're probably overpaying for utilities, insurance etc. as well but that doesn't really negate the point.

Everyone is at pains to point out why annuities are expensive - that's nice to know but the key thing is that they're expensive. When things go up in price people tend to try and reduce how much they buy and seek alternatives.

BritishInvestor

Sailtheworld said:

zagfles said:

Sailtheworld said:

michaels said:

So why are annuities so expensive?

Because they tend to be purchased by people at the less financially savvy end of the bell curve.

No they aren't. Those people will look at the pension value or CETV and say, duh, that's a big number, definitely better than my annual DB pension, I'll transfer it and I'll be mega rich. Generally, financially clueless people will underestimate how much a guaranteed income will cost, and they'd think it a no-brainer to take a £million lump sum over a £30k pa inflation linked pension. So they'd avoid buying an annuity, as they think rates are so low because they're being ripped off by insurance companies in their fancy buildings etc rather than very low gilt yields, negative in the case of index linked.

People doing as you describe are at the less financially savvy end of the bell curve too. They're probably overpaying for utilities, insurance etc. as well but that doesn't really negate the point.

Everyone is at pains to point out why annuities are expensive - that's nice to know but the key thing is that they're expensive. When things go up in price people tend to try and reduce how much they buy and seek alternatives.

Expensive relative to what?

[Deleted User]

Sailtheworld said:

garmeg said:

Sailtheworld said:

michaels said:

So why are annuities so expensive?

Because they tend to be purchased by people at the less financially savvy end of the bell curve.

No. They are expensive because gilt yields are very low and annuity providers will be investing (almost all of) the purchase monies in gilts of appropriate term to match the profile of their liabilities.

You go through a working life saving and taking investment risk but then, at a flick of a switch, decide to spend the next 30 years living on today's gilt yield just because that's how it has always been done?

The financially savvy tend to try and avoid expensive things. They're also aware that annuity providers aren't acting altruistically.

You are going through your working life having fixed income. Your education is a bond. You get paid through your salary for decades after.  While you have this income you can afford to invest in a volatile asset. Once you no longer have a salary you need to replace at least part of it with something that does not depend on an asset which can lose 70% quickly. Annuity is one of the tools to consider. 

I have no evidence to suggest that annuities are expensive. This requires a lot of stats and maths I haven’t looked into. 

MK62

zagfles said:

Sailtheworld said:

michaels said:

So why are annuities so expensive?

Because they tend to be purchased by people at the less financially savvy end of the bell curve.

No they aren't. Those people will look at the pension value or CETV and say, duh, that's a big number, definitely better than my annual DB pension, I'll transfer it and I'll be mega rich. Generally, financially clueless people will underestimate how much a guaranteed income will cost, and they'd think it a no-brainer to take a £million lump sum over a £30k pa inflation linked pension. So they'd avoid buying an annuity, as they think rates are so low because they're being ripped off by insurance companies in their fancy buildings etc rather than very low gilt yields, negative in the case of index linked.

On the other hand, who, today, at 55, would swap £1M for a joint life, index linked annuity of c£15-16k pa? That's what's on offer from annuity providers at the moment.
I agree with your point about some people getting dazzled by the big number on offer with a DB CETV (hence the need to take professional advice), but while swapping a £30k pa DB pension at 55 for £1M might not be that smart a move in most cases..... at 75 it'd be a different proposition.....age is a key variable here.

That said, the original question is about the value on offer from annuity providers at the moment, not whether it's wise to transfer out from a DB pension....