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

westv

itwasntme001 said:

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?

In a way it is insurance against living too long.

BritishInvestor

Sailtheworld said:

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.

Are you paying fund managers or holding cash?

itwasntme001

westv said:

itwasntme001 said:

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?

In a way it is insurance against living too long.

Yes that's true, so its a guaranteed income product + longevity insurance.

It certainly is not an insurance product alone.

Sailtheworld

itwasntme001 said:

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.

The more difficult calculation (and the one that matters if the choice is between annuity & DIY) is whether the additional risk of going DIY and keeping the capital is better value.

At 60 you're young, have a full set of marbles and still have plenty of human capital left as a fall back. Even the most risk averse wouldn't suggest that a lump sum (some of which won't be needed for 25 years) should be invested 100% in gilt like investments just to be on the safe side.

itwasntme001

Sailtheworld said:

itwasntme001 said:

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.

The more difficult calculation (and the one that matters if the choice is between annuity & DIY) is whether the additional risk of going DIY and keeping the capital is better value.

At 60 you're young, have a full set of marbles and still have plenty of human capital left as a fall back. Even the most risk averse wouldn't suggest that a lump sum (some of which won't be needed for 25 years) should be invested 100% in gilt like investments just to be on the safe side.

If you don't have any beneficiaries, don't have a lot of income elsewhere, are healthy and think expected returns going forward will be low, an annuity is a no-brainer for the bulk of your capital.  The hedge against longevity and losing your marbles early is very valuable.

Thrugelmir

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.

How many people accumulate a £1 million in their SIPP by the time they are 55.  Those that do are going to have considerable sums in other assets as well.  

Sailtheworld

itwasntme001 said:

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?

You're buying a guaranteed income and peace of mind.

Of course how much additional risk is the million dollar question otherwise you can only prove annuities are fair value when compared to 30 year gilts. They aren't the two options when someone is deciding whether to buy an annuity or not so not entirely relevant.

As the OP points out statistical analysis of the past shows it's not an unreasonable expectation to expect a DIY route to outperform an annuity. My take would be that those buying them worry too much about the future and pay a premium for the peace of mind element or, perhaps more likely, the older generation still see an annuity as the default route.

itwasntme001

Sailtheworld said:

itwasntme001 said:

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?

You're buying a guaranteed income and peace of mind.

Of course how much additional risk is the million dollar question otherwise you can only prove annuities are fair value when compared to 30 year gilts. They aren't the two options when someone is deciding whether to buy an annuity or not so not entirely relevant.

As the OP points out statistical analysis of the past shows it's not an unreasonable expectation to expect a DIY route to outperform an annuity. My take would be that those buying them worry too much about the future and pay a premium for the peace of mind element or, perhaps more likely, the older generation still see an annuity as the default route.

You can't extrapolate the past and assume you will get the same returns.  Everything is pointing to lower expected returns going forward.  This is priced into bonds and annuities.  But at least with annuities you don't need to worry about longevity risk and dementia risk and low/negative REAL returns risk and crucially, you don;t need to worry at all about sequence of returns risk.

Annuities are perfectly fine and sensible choice for a retiree.

Sailtheworld

BritishInvestor said:

Sailtheworld said:

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.

Are you paying fund managers or holding cash?

If you hold shares / ETFs the custody charge will be £10 / month max. There are no drawdown charges from tomorrow. I'm not at a drawdown age yet and invest once per year. Total platform charges next year will be £129.95 plus 0.22% OCF for one ETF and 0.07% for the other. Plus a few other trades because I can't help myself.

JohnWinder

Sailtheworld said:

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.

You go through your working life with human capital intact, converting it into savings and allowing you to take investment risk. Then, at the flick of a switch, you're retired and have no human capital, relying on your savings/investments so you need to be a bit cautious. If returns today are lower than desired, that's just how it is, so you either take more risk (not for some people), work longer (no thanks), or reduce your consumption (maybe).

Yes, they may be forced buyers with gritted teeth, but as we spent the last forty years in a social transition from providing defined benefit retirement incomes to expecting an ill-informed population to manage their own defined contribution retirement savings without much capacity to do so, what do we expect?