Inflation again

tichtich

Thrugelmir said:

tichtich said:

Thrugelmir said:

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. 

Yes, it's good if you compare with current fixed interest rates. But I wouldn't for a moment consider investing in long-term fixed-interest bonds at current rates. (The comparison should probably be with 25-year bonds, as male life expectancy at 60 is 25 years.)  Such investments are not really risk free, because of the risk of inflation. And even on the current inflation rate I think they are giving negative real returns. I would much rather risk the stock market than settle for that.

"Shares aren't correlated to rise with inflation if that was your thinking behind transferring to the SIPP."

I'm not sure what you mean here by "correlated", but I would expect the stock market to provide a real return over the long term. If that's not the case, it would largely undermine the idea of using the stock market to save for retirement. You'd be better off buying property, gold, or maybe just filling a warehouse with non-perishable goods!

A higher rate of inflation does not correspond to a higher level of company profitability. Other factors influence overall company profitability. Such as employee costs and higher rates of corporate taxation. Both items on Biden's reform agenda, 

I'm not sure what point you're making,  so let me return to my point that I think you were responding to, which was my suggestion that, in a period of high inflation, investing in the stock market would be a better bet over the long term than investing with a fixed 6% return. I didn't say how high inflation. For the sake of making the point clearer, let's assume a very high rate of inflation. Suppose that you were investing for the long term (say 25 years) and you expected inflation to be 20% p.a. over that period. Would you prefer investing over that period at 6% fixed return or investing in the stock market (let's say in global tracker fund)? Even if 20% inflation is bad for the economy and Biden hurts the economy by putting up taxes, the stock market is still going to give better than -14% p.a. real return over those 25 years (which is what the 6% fixed would return). A -14% real return over 25 years would be a loss of 97.7%! I think the stock market can do better than that,  even in unfavourable conditions. 

tichtich

jamesd said:

Still, I like guaranteed and inflation protected income so much that I usually want to recommend state pension deferral and eventual annuity buying.

I agree about deferring state pension. My current retirement plans include deferring from age 66 to 70. Deferral for 1 year at SRA gives you a 5.8% annuity rate, which I believe is nearly double what you can get on the open market for index linked (if you're healthy). The benefit declines slowly each year, as the 5.8% stays fixed and doesn't reflect your increased age, and because it isn't compounded. (At least I think it isn't. I hope someone will tell me I'm wrong.) Still, even though the benefit of deferral  declines with age,  I think it's a good deal at least up to age 70.

I wonder whether the people who aren't so concerned about inflation-proofing are younger people who didn't live through the 70s and early 80s. 

sheslookinhot

Why defer the SP ? Is it not better to take when due and enjoy the benefits it brings. All you would be doing is getting a slightly increased amount for a shorter time period in which to spend it.

NedS

sheslookinhot said:

Why defer the SP ? Is it not better to take when due and enjoy the benefits it brings. All you would be doing is getting a slightly increased amount for a shorter time period in which to spend it.

A full state pension is currently £9337. If you were to defer for one year, you'd get a 5.8% increase (return), inflation linked for life. To defer for one year, you'd presumably need to fund that £9337 out of savings / DC pension drawdown.

The question you have to ask yourself is if you didn't defer, how confident are you that you could invest that £9337 and achieve a guaranteed 5.8% index-linked return for life? If you already have a large amount of guaranteed fixed income (maybe a large DB / final salary pension), then it maybe less appealing, but if you do not have enough guaranteed income to at least cover your essential non-discretionary spending, then I can see how it would be very appealing. The rates are not dissimilar to buying extra DB pension in a civil service pension scheme, which is widely regarded to be one of the very best you can get.

Linton

sheslookinhot said:

Why defer the SP ? Is it not better to take when due and enjoy the benefits it brings. All you would be doing is getting a slightly increased amount for a shorter time period in which to spend it.

You either defer the SP and use equivalent savings for current benefits or you spend the SP and keep the savings for later.  Deferring the SP gives you the equivalent of a 5.8% inflation linked annuity rate.  This is an extremely good deal, perhaps twice the rate of equivalent commercial products at the same age, and is 100% safe.  It is a very efficient way of providing future income for your very old age and reducing the risks of dependency on a pension pot.

tichtich

sheslookinhot said:

Why defer the SP ? Is it not better to take when due and enjoy the benefits it brings. All you would be doing is getting a slightly increased amount for a shorter time period in which to spend it.

People who suggest deferral are (probably) not talking about deferring retirement, and they would have other money to live on until they take their state pension. So they wouldn't have less time to enjoy their retirement. It's a question of what strategy would provide the best results over their whole retirement.

There's no certainty that any strategy will give the best results.  But we're trying to allow for different possibilities as far as possible. Part of that is planning for how we would manage if we lived much longer than average and/or inflation is much higher than now. And if we have other sources of retirement income that don't do so well under those circumstance, then having more state pension (which is ideal for those circumstances) will help to give a good overall balance. If we live longer than average life expectancy,  we want to have enough income to enjoy those extra years too.

Stubod

..the idea of deferring the state pension appeals to me as I have a very small, non indexed linked DB pension, (which is around the same value as the SP but not indexed linked).

It makes sense that I start taking the DB at 65 and defer my SP until age 67/68.

We have some investments but I like the "security" of having a larger SP as at least this is index linked.

I think an earlier thread suggested it probably wasn't worth deferring the SP much past around 4 years due to diminishing returns and that fact that if you "go" early there is no benefit to your spouse for deferring and that money is effectively "lost".

GeordieGeorge

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

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

my PP only needs to last me 25 years , I have alternatives after that,

Full GPS , government pension scheme


Thrugelmir, sorry think you misunderstood, my point was that my inflation was on my costs and not applied to my pension pot , which is what most calculators do?

You’re measuring over the period when quantitative easing has driven up asset prices significantly. To assume that that will be repeated for any period from now is not sensible.

You seem to want to not take the advice that you asked for, which I think is very silly, but it’s your money.

When you have to choose which of your family gets to eat in your bed-sit in ten years, do you have the skills to find a new career again, despite a strange decade-long gap in your CV?

Thrugelmir

tichtich said:

Thrugelmir said:

tichtich said:

Thrugelmir said:

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. 

Yes, it's good if you compare with current fixed interest rates. But I wouldn't for a moment consider investing in long-term fixed-interest bonds at current rates. (The comparison should probably be with 25-year bonds, as male life expectancy at 60 is 25 years.)  Such investments are not really risk free, because of the risk of inflation. And even on the current inflation rate I think they are giving negative real returns. I would much rather risk the stock market than settle for that.

"Shares aren't correlated to rise with inflation if that was your thinking behind transferring to the SIPP."

I'm not sure what you mean here by "correlated", but I would expect the stock market to provide a real return over the long term. If that's not the case, it would largely undermine the idea of using the stock market to save for retirement. You'd be better off buying property, gold, or maybe just filling a warehouse with non-perishable goods!

A higher rate of inflation does not correspond to a higher level of company profitability. Other factors influence overall company profitability. Such as employee costs and higher rates of corporate taxation. Both items on Biden's reform agenda, 

I'm not sure what point you're making,  so let me return to my point that I think you were responding to, which was my suggestion that, in a period of high inflation, investing in the stock market would be a better bet over the long term than investing with a fixed 6% return. I didn't say how high inflation. For the sake of making the point clearer, let's assume a very high rate of inflation. Suppose that you were investing for the long term (say 25 years) and you expected inflation to be 20% p.a. over that period. Would you prefer investing over that period at 6% fixed return or investing in the stock market (let's say in global tracker fund)? Even if 20% inflation is bad for the economy and Biden hurts the economy by putting up taxes, the stock market is still going to give better than -14% p.a. real return over those 25 years (which is what the 6% fixed would return). A -14% real return over 25 years would be a loss of 97.7%! I think the stock market can do better than that,  even in unfavourable conditions. 

Rather than bet better to understand fully how markets function. My question to you is.  If inflation were to rise to 20%, why would fixed interest stocks (i.e. Government bonds) remain at a 6% yield?   

michaels

Thrugelmir said:

tichtich said:

Thrugelmir said:

tichtich said:

Thrugelmir said:

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. 

Yes, it's good if you compare with current fixed interest rates. But I wouldn't for a moment consider investing in long-term fixed-interest bonds at current rates. (The comparison should probably be with 25-year bonds, as male life expectancy at 60 is 25 years.)  Such investments are not really risk free, because of the risk of inflation. And even on the current inflation rate I think they are giving negative real returns. I would much rather risk the stock market than settle for that.

"Shares aren't correlated to rise with inflation if that was your thinking behind transferring to the SIPP."

I'm not sure what you mean here by "correlated", but I would expect the stock market to provide a real return over the long term. If that's not the case, it would largely undermine the idea of using the stock market to save for retirement. You'd be better off buying property, gold, or maybe just filling a warehouse with non-perishable goods!

A higher rate of inflation does not correspond to a higher level of company profitability. Other factors influence overall company profitability. Such as employee costs and higher rates of corporate taxation. Both items on Biden's reform agenda, 

I'm not sure what point you're making,  so let me return to my point that I think you were responding to, which was my suggestion that, in a period of high inflation, investing in the stock market would be a better bet over the long term than investing with a fixed 6% return. I didn't say how high inflation. For the sake of making the point clearer, let's assume a very high rate of inflation. Suppose that you were investing for the long term (say 25 years) and you expected inflation to be 20% p.a. over that period. Would you prefer investing over that period at 6% fixed return or investing in the stock market (let's say in global tracker fund)? Even if 20% inflation is bad for the economy and Biden hurts the economy by putting up taxes, the stock market is still going to give better than -14% p.a. real return over those 25 years (which is what the 6% fixed would return). A -14% real return over 25 years would be a loss of 97.7%! I think the stock market can do better than that,  even in unfavourable conditions. 

Rather than bet better to understand fully how markets function. My question to you is.  If inflation were to rise to 20%, why would fixed interest stocks (i.e. Government bonds) remain at a 6% yield?   

Bonds will always return the yield at which you purchased them, so if you purchased a £100 20 year gov bond paying 1.5% it will pay 1.50 per year for 20 years, whatever happens to inflation.  If inflation rises in the mean time there will also be a capital loss if you want to sell before the end of the term as the relative value of that fixed return diminishes.