How much to live on

blue.peter

Annuities are absolutely the right product for some people. Not everyone, but definitely some. They shift the risk from the individual to an insurance company. Of course the insurer has costs to meet and a profit to make, but for some that's a price worth paying for the peace of mind that they get.

There are a lot of people who don't have the financial savvy to operate income drawdown and the underlying investments for themselves (or want to pay an adviser to do it for them).

There are people who don't want the risk associated with income drawdown and DIY investment.

There are people who will live a long time (or think they might), and don't want to risk outliving their retirement fund. Playing it safe should leave some money over when they die, but maybe they don't want that. An annuity gives certainty of income for the rest of their life.

With regard to inflation, RPI-linked annuities are readily available. (I have one.) These are inflation-proof. (Better, if you favour CPI as a measure, since RPI is typically about 1% pa above CPI.) It is simply not true to say that they leave annuitants "utterly exposed to ... INFLATION". Some do, certainly, but this is an option over which the annuitant has control at outset. It's all about the choices made at retirement. Insurers and advisers make the options available clear. Do they want a higher income initially, but which will be eroded by inflation, or do they want an income that's lower at the beginning, but which maintains its value?

I fully accept that income drawdown is right for some - possibly many - people. But the argument that annuities are wrong for everyone is simply wrong. It's very much about attitude to risk. If you're risk-averse, as a lot of people are, annuities make perfect sense. Investment expertise is relevant, too. Not everyone has it or, if they do, want to use it in relation to their retirement income.

And longevity insurance is EXACTLY what an annuity is. It gives security against a retirement fund running out before death. There are winners and losers with annuities. Which are which depends on longevity. But you can't tell which any person will be without the benefit of hindsight (though underwriting can give some insight, and annuity rate nowadays usually reflect this). What's bizarre is that some people don't seem to understand this.

hugheskevi

The theory of annuities is great, but with gilt and high quality corporate bond yields at such low levels, annuities in practice are extremely expensive products.

The low yields mean that purchasers of annuities are locking in a very low rate of return. That removes any investment risk, but at the expense of indirectly accepting the terrible rate of return of gilts and bonds.

The expected return of a non-escalating annuity is about 90% (ie based on what you would get back from bond investments given average life expectancy), based on the Moneysworth research of annuities done for DWP about a decade ago. That exchanges investment risk for inflation risk. An inflation-linked annuity had an expected return of 75%.

That research was prior to pension freedoms in 2015, and the increased adverse selection and lower demand for annuities should have reduced the expected returns, although I'm not aware of any recent research.

There is an unfortunate legacy of single-life annuties, which may affect quite a lot of people in the coming years given the majority were probably purchased about 20 years ago as the shift to Defined Contribution pensions which escalated in the 1990s increased the numbers with Defined Contribution pensions, and annuities were the usual way to draw pension. I heard many stories that people simply ticked the box that gave them the highest income (single-life, non-escalating annuity) with no further thought.

State Pension deferral can be a useful alternative to annuitisation. For some, it may even be possible to briefly get a public sector job in advance of retirement and transfer-in to a Defined Benefit pension. There are also options around using drawdown initially and then annutiising at around age 70-75 when the mortality gain of annuities may make them more attractive (very few die in their 60s, so the mortality pooling has little effect before age 70).

Dazza1902

How favourable is it to transfer into a career av scheme like the lgps ? I assume, one could leave part of the DC pot in tact for flexibility.
 Perhaps not a great idea though if you want to retire before the schemes NPA.

hugheskevi

Dazza1902 said:

How favourable is it to transfer into a career av scheme like the lgps ? I assume, one could leave part of the DC pot in tact for flexibility.
 Perhaps not a great idea though if you want to retire before the schemes NPA.

Transfer terms are usually very favourable. Factors are based on the SCAPE discount rate which has a discount rate (effectively an assumed future rate of return) of CPI+2.4%.

Compared to purchasing an annuity, I'd expect transferring and commencing pension early with actuarial reduction to be far more beneficial.

DairyQueen

PennyForThem_2 said:

arnoldy said:

DairyQueen said:

Nobody (in their right mind) will buy an annuity right now. Why would anyone sign-uo to a guaranteed loss of capital?

@hugheskevi rightly illustrates that a DC pension/SIPP will 100% pass to the surviving partner.

You are missing a trick.

Totally agree, annuities can be very dangerous products and IMO will be one of the next miss-selling scandals. Most annuities are "fixed" and leave you utterly exposed to something you have no control over - INFLATION. Bizarre that people think that they are some form of longevity insurance. 

Ok you can buy an annuity with a bit of inflation protection, and half pay for the survivor - but you would be luck to get 2.5% and have to give up all your capital. In contrast FTSE All share is way over 3% at the moment natural yield.

MATH does not add up for annuities.

My now deceased husband bought an annuity that gave me 50% when he died + 4% p.a. I think around 2007-8.  For me as survivor it has given me a rock of guaranteed income (which has out performed due to 4% increase annually - and yes I know markets SIPPs etc can do better than this) in the same way that my SP has.  

The problem being that annuity rates have fallen through the floor since the financial crisis (i.e. since your husband made that purchase). QE, more QE, and yet more QE.

Anyone buying an annuity back then would have received a decent return for foregoing a sizeable chunk of money. Now, a 65-year-old would be lucky to receive much above  £3kp.a. (joint life, 3% escalation) per £100k. 

A single-life, level annuity bought at the same age would buy around £5,100 income today. In early 2008 annuity rates peaked (lucky you) and it would have bought around £7,900.

With inflation pushing toward 5% a real terms income reduction can't be avoided for the majority of annuitants. There is no sign of rates increasing anytime soon.

Annuities may be worth considering if the rates increase substantially, or when you reach 75+. Right now, this kind of income security is too expensive for most people. It's also inflexible. 

[Deleted User]

Wishing all my fellow posters on this thread a Happy and Peaceful Christmas .
A little update from me too. Just agreed another 3 days a fortnight contract with my school doing some teaching this time. Although I have said this before, this may be the last one lol! 

However, 3 days  a fortnight gives me a good work life balance especially in these difficult times. To be honest it keeps my outlook young and fresh! 

I will use the money earned to replenish depleted savings after a year of some upgrades to house and garden. I am really enjoying my new kitchen and can relax knowing the garage is now watertight! 

In next years budget I have made provision for a few smaller scale improvements. Also looked at a travel budget, but whether or not it will be used will depend on how public health situation develops. I also have a BA travel voucher worth £1100, that has to be used by April 2023. Could be useful for some flights to the sun!

I had a very pleasant surprise regarding my NI voluntary contributions top up. I only had to pay another £31 (2020 to 2021)to secure another full year! I must have paid more than I realised through my part time working. Just another 3 years of payments to go (47 in all owing to be contracted out) and at least two of those will be partly funded through my part time employment. I rechecked my state pension forecast and, if pay my 47 years, will only be about 60 pence short of the maximum at age 66 ,which pleases me.

I am so grateful that my pension income is secure and index linked. However,  I have worked over 40 years in a demanding job to get in that position. Will never be rich, but will be comfortable. 

Best Wishes.

mummytummy

[Deleted User] said:

Will never be rich, but will be comfortable. 

That’s all I’m hoping for 

Sterlingtimes

Energy costs will burden the retired who have to heat their homes for a greater number of hours. For my gas, I was paying 2.2 pence per kilo Watt-hour in August. That was increased to 3.1 pence per kilo Watt-hour in September and with the failure of my gas supplier, this increases to 4.2 pence per kilo Watt-hour from December. A 91% increase for me.

blue.peter

Yes, similar here.

1/11/2021

Electricity: +30.99%

Gas: +19.99%

And then I got another e-mail last Friday.

17/1/2022

Electricity: +46.65%

Gas: +29.35%

It's getting uncomfortable. I'm fortunate: my pension is sufficient to absorb that. But there are folk for whom it's a real problem. Inter alia, I can see increasing demand on food banks.

QrizB

blue.peter said:

Yes, similar here.

1/11/2021

Electricity: +30.99%

Gas: +19.99%

And then I got another e-mail last Friday.

17/1/2022

Electricity: +46.65%

Gas: +29.35%

It's getting uncomfortable. I'm fortunate: my pension is sufficient to absorb that. But there are folk for whom it's a real problem. Inter alia, I can see increasing demand on food banks.

I don't know which supplier you're with or how much your tariff acually costs but a hike in January is unusual; most people who aren't on fixed tariffs are paying the Ofgem-capped rate which was set on October and won't change again until April.