Inflation again

Thrugelmir

Nick9967 said:

but over the past 10 years , bit more to be fair I’ve had no where near returns that low, not even close, not my choice of investments , 

That's why all stock market investments are plastered with the disclaimer that "Past performance is no guarantee of future results."

The longer bull markets run for the greater the level of investor complacency. After all what could possibly go wrong. At some point it will. There'll be an another extended bear market. 

Malthusian

Nick9967 said:

I’m really no investment expert, can’t tell can you!
but over the past 10 years , bit more to be fair I’ve had no where near returns that low, not even close, not my choice of investments , I use Aspira so nothing flash and always has done me well

Law of diminishing returns.

Experts were saying ten years ago that it was folly to expect investments to return more than inflation and in the following ten years the world economy proved them wrong. But eventually they will be proved right. Even if it's only when the Sun starts to burn out.

However the main reason it is better to make conservative assumptions of future growth has nothing to do with past investment performance or guesses about future performances. It is because it is better to be pessimistic and pleasantly surprised than optimistic and disappointed. This reasoning is based on hard facts about the way the brain is wired, not guesses about the future.

(Finding £20 on the street brings a beggar more happiness than a millionaire. This is called the "diminishing marginal utility of money". One well-known consequence of the diminishing marginal utility of money is loss aversion; losing £100 brings more pain than gaining £100 brings pleasure. Another consequence is that a negative difference between expectation and reality brings more pain than the equivalent positive difference between expectation and reality brings pleasure.)

is Which that far out as a calculator? Even their pessimistic option does 0%, 4% and 6%

For cash, fixed interest and equities? As a "pessimistic" assumption, yes, that is out. (Apart from the cash bit - that just is what it is.)  It is not necessarily a wildly optimistic assumption that will lead to bad decisions but what it isn't is "pessimistic". As per FCA regulations on assumptions used in statutory projections, 3.5% above inflation for equities would be considered somewhere between "medium" and "high" (i.e. between a balanced and optimistic view).

Thrugelmir

Malthusian said:

Nick9967 said:

I’m really no investment expert, can’t tell can you!
but over the past 10 years , bit more to be fair I’ve had no where near returns that low, not even close, not my choice of investments , I use Aspira so nothing flash and always has done me well

Experts were saying ten years ago that it was folly to expect investments to return more than inflation and in the following ten years the world economy proved them wrong. But eventually they will be proved right.

Ten years ago no one foresaw record low interest rates , QE and $30 trillion of helicoptered cash due to a global pandemic.  All of which have contributed to pushing asset prices higher. Meanwhile even in the 3 years leading up the pandemic. Global growth was already  in steady decline. Profit is only profit when it's sitting as cash in your bank account. Otherwise it's a number on a computer screen/piece of paper. Retail investors are the ones currently chasing the pot of gold at the end of the rainbow. Someone unfortunately always gets their fingers burnt when the correction finally arrives. 

Nick9967

Thanks all , has any one got any guidance on main question , inflation and what its calculated on?

tichtich

Malthusian said:

However the main reason it is better to make conservative assumptions of future growth has nothing to do with past investment performance or guesses about future performances. It is because it is better to be pessimistic and pleasantly surprised than optimistic and disappointed. This reasoning is based on hard facts about the way the brain is wired, not guesses about the future.

(Finding £20 on the street brings a beggar more happiness than a millionaire. This is called the "diminishing marginal utility of money". One well-known consequence of the diminishing marginal utility of money is loss aversion; losing £100 brings more pain than gaining £100 brings pleasure. Another consequence is that a negative difference between expectation and reality brings more pain than the equivalent positive difference between expectation and reality brings pleasure.)

I think it's more than just psychology. If you expect a higher rate of return you are likely not to save as much, which could leave you in a poorer position to cope with low returns than you would have been if you'd planned for low returns in the first place.

Personally, my base plan assumes 3% long-term returns over inflation, but I could survive on less. Since my needs are low and my investments are correspondingly small, my state pension will make up the bulk of my retirement income. So I'm less dependent on investment returns but heavily dependent on the government keeping its hands off my state pension!

tichtich

Also relating to inflation, what do you think about the fixed annuities that are still being given out? At 60 I was entitled to a section 32 fixed annuity and had to choose whether to take that or the transfer value I was offered. Reassure warned me against giving up the "valuable guaranteed income for life" (as they were probably obliged to do). But of course a fixed annuity is not really a guaranteed income for life. Inflation will certainly reduce it and could wipe it out almost entirely.

While I certainly wouldn't consider buying a fixed annuity at current rates, I did decide to take the fixed annuity on offer, as the transfer value available was only half the cost of buying the annuity on the open market. So effectively I was buying a fixed annuity at double the market annuity rate. (I assumed that if I took the transfer value I could have put it in a SIPP, but now I'm not sure if that was the case.) At that price I decided to take it, seeing it not as a pension for life, but just as a source of funds spread over time which I would invest in my SIPP (until I stop work) or use it to reduce withdrawals from my SIPP (later), and hopefully this would work out slightly better value than just investing the transfer value immediately. I just assumed that getting the annuity at half the market price made it decent value, but I didn't do any calculations. However, the other day I did a rough calculation and I reckon that the purchase amounted to getting a return of about 6% p.a. (allowing for mortality). With inflation at 2%, that amounts to a real return of 4%, which I'm happy with. But if inflation rises (which I expect), it doesn't look so good. In retrospect I don't think it was the right choice (assuming that the alternative was to invest the transfer value in a SIPP). But it wasn't an awful choice. I've already had 3 years annuity with inflation low, hopefully inflation won't go up too quickly, and--who knows--we could some time have a long period of deflation, in which case I would benefit.

It seems to me that the idea behind buying an annuity is that you get a guaranteed income for life by sacrificing the _probably_ higher (but uncertain) returns you could have got from investments. That makes sense if the annuity is index-linked (assuming you get an attractive enough rate). But with a fixed annuity you're sacrificing probable returns and getting no certainty in return. So a fixed annuity makes no sense (unless it's high enough above market rate to give you a higher expected return than the alternative).

My section 32 was probably better than the norm, as it was payable from age 60. (I also got more than just the GMP.) I suspect that in the typical case, the transfer value would be a larger proportion of the market cost of the annuity, in which case the choice to take the annuity would be poorer than in my case. So probably most people being offered fixed annuities would be better off taking the transfer value and putting it in a SIPP (if that's an option). I'm curious to know what the usual advice is in these cases.

P.S. Just thinking... In most cases do Section 32s just pay the annuity that can be purchased by the pot, and is the transfer value just the pot? In that case, you would actually be buying the annuity at market rates, and taking the transfer would (I think) be a no-brainer.
Scratch that. I was forgetting that section 32s generally pay an annuity based on GMP.

Thrugelmir

tichtich said:

Also relating to inflation, what do you think about the fixed annuities that are still being given out? At 60 I was entitled to a section 32 fixed annuity and had to choose whether to take that or the transfer value I was offered. Reassure warned me against giving up the "valuable guaranteed income for life" (as they were probably obliged to do). But of course a fixed annuity is not really a guaranteed income for life. Inflation will certainly reduce it and could wipe it out almost entirely.

While I certainly wouldn't consider buying a fixed annuity at current rates, I did decide to take the fixed annuity on offer, as the transfer value available was only half the cost of buying the annuity on the open market. So effectively I was buying a fixed annuity at double the market annuity rate. (I assumed that if I took the transfer value I could have put it in a SIPP, but now I'm not sure if that was the case.) At that price I decided to take it, seeing it not as a pension for life, but just as a source of funds spread over time which I would invest in my SIPP (until I stop work) or use it to reduce withdrawals from my SIPP (later), and hopefully this would work out slightly better value than just investing the transfer value immediately. I just assumed that getting the annuity at half the market price made it decent value, but I didn't do any calculations. However, the other day I did a rough calculation and I reckon that the purchase amounted to getting a return of about 6% p.a. (allowing for mortality). With inflation at 2%, that amounts to a real return of 4%, which I'm happy with. But if inflation rises (which I expect), it doesn't look so good. In retrospect I don't think it was the right choice (assuming that the alternative was to invest the transfer value in a SIPP). But it wasn't an awful choice. I've already had 3 years annuity with inflation low, hopefully inflation won't go up too quickly, and--who knows--we could some time have a long period of deflation, in which case I would benefit.

It seems to me that the idea behind buying an annuity is that you get a guaranteed income for life by sacrificing the _probably_ higher (but uncertain) returns you could have got from investments. That makes sense if the annuity is index-linked (assuming you get an attractive enough rate). But with a fixed annuity you're sacrificing probable returns and getting no certainty in return. So a fixed annuity makes no sense (unless it's high enough above market rate to give you a higher expected return than the alternative).

My section 32 was probably better than the norm, as it was payable from age 60. (I also got more than just the GMP.) I suspect that in the typical case, the transfer value would be a larger proportion of the market cost of the annuity, in which case the choice to take the annuity would be poorer than in my case. So probably most people being offered fixed annuities would be better off taking the transfer value and putting it in a SIPP (if that's an option). I'm curious to know what the usual advice is in these cases.

What was the transfer value you were offered and the annuity you accepted. 

tichtich

Thrugelmir said:

tichtich said:

Also relating to inflation, what do you think about the fixed annuities that are still being given out? At 60 I was entitled to a section 32 fixed annuity and had to choose whether to take that or the transfer value I was offered. Reassure warned me against giving up the "valuable guaranteed income for life" (as they were probably obliged to do). But of course a fixed annuity is not really a guaranteed income for life. Inflation will certainly reduce it and could wipe it out almost entirely.

While I certainly wouldn't consider buying a fixed annuity at current rates, I did decide to take the fixed annuity on offer, as the transfer value available was only half the cost of buying the annuity on the open market. So effectively I was buying a fixed annuity at double the market annuity rate. (I assumed that if I took the transfer value I could have put it in a SIPP, but now I'm not sure if that was the case.) At that price I decided to take it, seeing it not as a pension for life, but just as a source of funds spread over time which I would invest in my SIPP (until I stop work) or use it to reduce withdrawals from my SIPP (later), and hopefully this would work out slightly better value than just investing the transfer value immediately. I just assumed that getting the annuity at half the market price made it decent value, but I didn't do any calculations. However, the other day I did a rough calculation and I reckon that the purchase amounted to getting a return of about 6% p.a. (allowing for mortality). With inflation at 2%, that amounts to a real return of 4%, which I'm happy with. But if inflation rises (which I expect), it doesn't look so good. In retrospect I don't think it was the right choice (assuming that the alternative was to invest the transfer value in a SIPP). But it wasn't an awful choice. I've already had 3 years annuity with inflation low, hopefully inflation won't go up too quickly, and--who knows--we could some time have a long period of deflation, in which case I would benefit.

It seems to me that the idea behind buying an annuity is that you get a guaranteed income for life by sacrificing the _probably_ higher (but uncertain) returns you could have got from investments. That makes sense if the annuity is index-linked (assuming you get an attractive enough rate). But with a fixed annuity you're sacrificing probable returns and getting no certainty in return. So a fixed annuity makes no sense (unless it's high enough above market rate to give you a higher expected return than the alternative).

My section 32 was probably better than the norm, as it was payable from age 60. (I also got more than just the GMP.) I suspect that in the typical case, the transfer value would be a larger proportion of the market cost of the annuity, in which case the choice to take the annuity would be poorer than in my case. So probably most people being offered fixed annuities would be better off taking the transfer value and putting it in a SIPP (if that's an option). I'm curious to know what the usual advice is in these cases.

What was the transfer value you were offered and the annuity you accepted. 

Transfer value was £44,288, Annuity is about £3,600 (of which £2,814 was GMP).

Thrugelmir

tichtich said:

Thrugelmir said:

tichtich said:

Also relating to inflation, what do you think about the fixed annuities that are still being given out? At 60 I was entitled to a section 32 fixed annuity and had to choose whether to take that or the transfer value I was offered. Reassure warned me against giving up the "valuable guaranteed income for life" (as they were probably obliged to do). But of course a fixed annuity is not really a guaranteed income for life. Inflation will certainly reduce it and could wipe it out almost entirely.

While I certainly wouldn't consider buying a fixed annuity at current rates, I did decide to take the fixed annuity on offer, as the transfer value available was only half the cost of buying the annuity on the open market. So effectively I was buying a fixed annuity at double the market annuity rate. (I assumed that if I took the transfer value I could have put it in a SIPP, but now I'm not sure if that was the case.) At that price I decided to take it, seeing it not as a pension for life, but just as a source of funds spread over time which I would invest in my SIPP (until I stop work) or use it to reduce withdrawals from my SIPP (later), and hopefully this would work out slightly better value than just investing the transfer value immediately. I just assumed that getting the annuity at half the market price made it decent value, but I didn't do any calculations. However, the other day I did a rough calculation and I reckon that the purchase amounted to getting a return of about 6% p.a. (allowing for mortality). With inflation at 2%, that amounts to a real return of 4%, which I'm happy with. But if inflation rises (which I expect), it doesn't look so good. In retrospect I don't think it was the right choice (assuming that the alternative was to invest the transfer value in a SIPP). But it wasn't an awful choice. I've already had 3 years annuity with inflation low, hopefully inflation won't go up too quickly, and--who knows--we could some time have a long period of deflation, in which case I would benefit.

It seems to me that the idea behind buying an annuity is that you get a guaranteed income for life by sacrificing the _probably_ higher (but uncertain) returns you could have got from investments. That makes sense if the annuity is index-linked (assuming you get an attractive enough rate). But with a fixed annuity you're sacrificing probable returns and getting no certainty in return. So a fixed annuity makes no sense (unless it's high enough above market rate to give you a higher expected return than the alternative).

My section 32 was probably better than the norm, as it was payable from age 60. (I also got more than just the GMP.) I suspect that in the typical case, the transfer value would be a larger proportion of the market cost of the annuity, in which case the choice to take the annuity would be poorer than in my case. So probably most people being offered fixed annuities would be better off taking the transfer value and putting it in a SIPP (if that's an option). I'm curious to know what the usual advice is in these cases.

What was the transfer value you were offered and the annuity you accepted. 

Transfer value was £44,288, Annuity is about £3,600 (of which £2,814 was GMP).

That's an exceptionally good yield. There's no risk free fixed interest investments that come anywhere close. Shares aren't correlated to rise with inflation if that was your thinking behind transferring to the SIPP. In fact research studies have shown the majority of shares underperform the return cash in the longer term. 

[Deleted User]

“ It seems to me that the idea behind buying an annuity is that you get a guaranteed income for life by sacrificing the _probably_ higher (but uncertain) returns you could have got from investments. That makes sense if the annuity is index-linked (assuming you get an attractive enough rate). But with a fixed annuity you're sacrificing probable returns and getting no certainty in return. So a fixed annuity makes no sense (unless it's high enough above market rate to give you a higher expected return than the alternative).”

Annuity is insurance against

 a) poor market returns and
b) living too long 

You pay a premium for insurance. Annuity makes sense for anyone who has little fixed income compared to his/her planned expenditure in retirement  (such as Defined Benefit pension).  It also makes sense for people who are getting old and are at risk of mismanaging investments as we all lose some mental capacity. 

Inflation protected annuities do not make mathematical sense under most foreseeable scenarios. You pay too much premium for that kind of insurance. 

I’ve read a couple of studies showing that putting part of their investments into an annuity allows retirees to spend more. Even with current rates.