Annuities

Albermarle

TELLIT01 said:

Albermarle said:

TELLIT01 said:

On a small pension pot couldn't the admin costs of drawdowns outweigh the benefits of the flexibility?

With wrong provider and the wrong funds , the costs could be significant .
However it is possible to have a cost  of around 0.5% to 0.6% all in , even for a small pension pot. 

The reason I ask is that my wife had been with her current employer a comparatively short time and the pot from that employer is under £30k.  She already receives income from two other pensions.  Looking at options and info from Age Partnership, as an example, shows minimum charge of £1500 in setup costs for a drawdown.

I have three separate DC pensions, with different companies. None is yet in drawdown but I have checked the costs in advance, compared to what I pay now.
One has no extra charges at all .
One increases the charges but only by quite a small amount , about 0.05% 
With an older one , I will have to transfer it to a newer pension with the same company but the charges stay about the same . 

Normally you would only pay a fee like £1500 if you were taking regulated financial advice for someone to set up the investment portfolio for you . Looking at Google, it seems Age Partnership are an advisor company .

How did you come across them ? Where they suggested by your wife's employer pension provider ? Who is the pension provider? Some pension providers insist that you use a financial advisor but many do not .

TELLIT01

Not a link, but quoting from the booklet they sent "If you receive advice and choose to preceed with our recommended solution, we charge an advice fee of 2.25% of your pensions savings after tax-free cash has been taken, subject to a minimum of £1,495."

JohnWinder

 I can see why the simplicity of an annuity would appeal to the financially inept.

And not only the inept, but the Nobel prize winners in economics like Robert Merton.
The ?unique feature of an annuity is the mortality credits: some annuitants die early, benefiting the rest. Withdrawing from an at risk portfolio always means you can run out early, unless you constrain your spending so much the you guarantee that never happens. The same brilliant investments you can choose for that are the same brilliant ones a business offering an annuity can choose, but it doesn’t have to pay out to age 105 for everyone whereas the at risk portfolio has to be managed so that it can (just in case). As a community we waste a golden opportunity if we don’t make the most of the cleverness of annuities.

Secret2ndAccount

JohnWinder said:
The same brilliant investments you can choose for that are the same brilliant ones a business offering an annuity can choose, 

Not really. Annuity providers invest a lot in bonds and similar low risk instruments. They absolutely have to be able to keep paying out, however badly the stock market behaves. Bond yields suck at the moment, so annuity rates suck too. As bond returns increase, annuities will become more sensibly priced, and more popular.
As an individual, I can choose to invest 60% in (comparatively risky) equities, and accept the knowledge that I will have to take a haircut if things don't work out well. Therefore, my returns, 99% of the time, will be better than the annuity returns over 30 years. Currently, that is sufficient to out-compete the mortality credits. It's not just profiteering by the insurance companies.

SWR: 30 years, 0% fails in last 100 years, rising with inflation: 3%. Remaining pot passes by inheritance.
Annuity, single life, rising with inflation, age 55 (i.e. 30 years average) pays out 2% with no inheritance.

Thrugelmir

Secret2ndAccount said:

JohnWinder said:
The same brilliant investments you can choose for that are the same brilliant ones a business offering an annuity can choose, 

As an individual, I can choose to invest 60% in (comparatively risky) equities, and accept the knowledge that I will have to take a haircut if things don't work out well. Therefore, my returns, 99% of the time, will be better than the annuity returns over 30 years. 

That's a bold statement. Where's the other 40% being invested. 60% equities is going to struggle to the required heavy lifting. 

Secret2ndAccount

Are you suggesting that a 60/40 portfolio can't achieve an SWR of 2% with a 99% success rate? Gonna be a lot of sad people if you're right.

JohnWinder

SWR: 30 years, 0% fails in last 100 years, rising with inflation: 3%. Remaining pot passes by inheritance.
Annuity, single life, rising with inflation, age 55 (i.e. 30 years average) pays out 2% with no inheritance.

I’m with you in sentiment on your overall view, but this quote of yours is only good till age 85 (30 years on from 55). Then it’s into the unknown with an at risk portfolio, unless you want to re-state your SWR conditions. That annuity pays out until you’re 120+. So the comparison is not valid.
If you can safely (and not run out of money) invest in equities for 40 years of retirement to get a better return than bonds’, I don’t know why an annuity provider couldn’t also when their investment horizon is potentially much longer.
As well, your at risk portfolio envisages you taking a haircut if things go bad. That disadvantage doesn’t exist with an annuity, so they’re not easily comparable other than one brings the benefit of mortality credits as well as the business costs of providing the service.

BritishInvestor

Secret2ndAccount said:

Are you suggesting that a 60/40 portfolio can't achieve an SWR of 2% with a 99% success rate? Gonna be a lot of sad people if you're right.

It's important to separate theoretical results and real-world implementations. There are many out there that have invested in funds that have taken a 20-40% haircut this year. Their outcomes are likely to differ markedly from academic research.

westv

BritishInvestor said:

Secret2ndAccount said:

Are you suggesting that a 60/40 portfolio can't achieve an SWR of 2% with a 99% success rate? Gonna be a lot of sad people if you're right.

It's important to separate theoretical results and real-world implementations. There are many out there that have invested in funds that have taken a 20-40% haircut this year. Their outcomes are likely to differ markedly from academic research.

The whole point of a withdrawal rate that's sustainable is that it can ride out falls.

BritishInvestor

westv said:

BritishInvestor said:

Secret2ndAccount said:

Are you suggesting that a 60/40 portfolio can't achieve an SWR of 2% with a 99% success rate? Gonna be a lot of sad people if you're right.

It's important to separate theoretical results and real-world implementations. There are many out there that have invested in funds that have taken a 20-40% haircut this year. Their outcomes are likely to differ markedly from academic research.

The whole point of a withdrawal rate that's sustainable is that it can ride out falls.

Agreed, but the underlying asset classes used in the research is vastly different from those being used by many people.