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

zagfles

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.

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

As opposed to drawdown providers, fund houses, financial advisers etc?

zagfles

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.

What alternative would you suggest for someone who wants a guaranteed inflation linked income for life?

zagfles

MK62 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.

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....

It was a point about the relative value of a lump sum and a guaranteed annual income for life, which applies to people doing it both ways, ie swapping a guaranteed income for a lump sum and vv. Obviously the decision will depend on the rate, so a 1.5% rate is one thing, but there are lots of people who take the optional lump sum from their DB pensions at commutation rates around 10 or so, so they're effectively turning down an index linked annuity rate of 10% !!!

Because the less "financially savvy" are more likely to underestimate the value of a guaranteed income for life, not overestimate it.

mark55man

In the book (Wade Pfau) that Mordko recommended, the supposed advantage of annuities were longevity protection through pooled mortality benefits, plus the ability for the providers to be invested in a more sophisticated fashion.  However, are we saying (posts above) that are limited (by practice or regulation) to gilts for liability matching.  That's a lot less attractive.

Plus there is still the question - independent of perceptions of value, are annuities competitively priced or is there is an element of structural unfairness (by which I mean unfair pricing or out and out gouging of muggles)

itwasntme001

itwasntme001 said:

A 30 year index linked gilt yields -2.2%.  A RPI linked annuity for a 60 year old "yields" +1.7%.  That is a near 4% difference in yield.  It takes about 25 years to recover the capital for the annuity to be "equivalent" to a linker.  Therefore an annuity seems pretty fair value if you expect to live for 25 years from 60, which is what the average in UK is anyway.

I have proven here that annuities are actually fairly priced.  Any benefits from pooling the insurance  companies receives as their compensation and to cover costs.

itwasntme001

I think annuity rates are strongly positively correlated to real interest rates (with perhaps more weak correlation during periods of higher expected returns on risky assets and a permanent change in mortality assumptions).  So thinking of buying annuity rates when they offer "better value" is the same as taking a view on what real interest rate will do - which no one will be able to forecast accurately so in reality it is just 50-50.  Perhaps, given the indebted world we are in today real interest rates will remain as they are now or go even lower...

AnotherJoe

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. 

1) Annuities should be cheaper because the pooling of longevity risk means that rather than having to set a rate that covers the maximum likely life expectancy they only need to cover average life expectancy.  So for a 65yo a sensible SWR would be based on at least 30 years of drawdown whereas for an annuity provider the average pay-out term is likely to be closer to 20 years.

2) There is also the issue that in general annuities pay less for a surviving spouse whereas a drawdown pot remains available.

So why are annuities so expensive?

Thats looking in the rearview mirror.

They have to look through the windscreen instead, eg the future, so allow for  risk, plus there are costs and profit.

Sailtheworld

zagfles said:

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.

What alternative would you suggest for someone who wants a guaranteed inflation linked income for life?

If that's what someone wants then obviously they've got to get an annuity and hang the cost. What they could consider is buying an annuity which guarantees just their basic outgoings. Buying insurance to cover fearfulness is expensive so may as well minimise where possible.

Alternatively they could try not to be so fearful and accept a little more risk.

itwasntme001

Sailtheworld said:

zagfles said:

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.

What alternative would you suggest for someone who wants a guaranteed inflation linked income for life?

If that's what someone wants then obviously they've got to get an annuity and hang the cost. What they could consider is buying an annuity which guarantees just their basic outgoings. Buying insurance to cover fearfulness is expensive so may as well minimise where possible.

Alternatively they could try not to be so fearful and accept a little more risk.

Buying an annuity is not for insurance purposes.  It is to provide a guaranteed income.  Like a state pension.

Accept a little more risk?  How little are we talking here?

Sailtheworld

zagfles said:

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.

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

As opposed to drawdown providers, fund houses, financial advisers etc?

With Youinvest you can have a £1,000,000 SIPP in drawdown and total charges would be £120/ year plus any trading. It's peanuts.