Annuities

OldScientist

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, 

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.

I'm not sure that you are quite comparing like with like (e.g. by assuming a 30 year life span at 55 - this is the average life expectancy, using that in retirement planning when there is an approximately 50% chance of exceeding that age and the plan then failing may be a bit optimistic). A more reasonable expected terminal age at 55 (for a single female) is either 94 (25% chance of exceeding) or 99 (10% chance of exceeding), see https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07) with male equivalents of 2 years less in each case.

                             Portfolio
Age  Annuity   Duration     SAFEMAX
55      1.8              43             2.6
60      2.2              37             2.7
65      2.9              32             2.9
70      3.7              27             3.1
75      5.0              22             3.5

Note:
Annuity rates from https://www.hl.co.uk/retirement/annuities/best-buy-rates (RPI, 5 year guarantee, single person)

Duration (years) assumes average of male and female life expectancies at the 10% exceedance level and for a single retiree (the duration for couples would be longer by 2-3 years) at the given age.

SAFEMAX has been calculated using the calculator at https://www.2020financial.co.uk/pension-drawdown-calculator/ with a 60/40 portfolio (and no fees). This calculator uses the Barclays cost of living index (which I think is CPI rather than RPI, but I'm sure someone will correct me if I'm wrong!) and a UK portfolio (I note that for returns since 1970, see https://portfoliocharts.com/portfolio/retirement-spending/, holding 20% UK, 20% US, and 20% developed ex-US stocks increased the SAFEMAX by 20-30 bps over holding solely UK stocks). However, fees would drag SAFEMAX down - assuming a reasonably low cost of 0.4% combined platform and fund fees, SAFEMAX would reduce by about 15-20 bps.

The effect of taxes have been ignored for both portfolio withdrawals and annuities.

As other (mostly US based) work has shown, annuities start to become attractive compared to portfolio-based withdrawals at ages around 70.

Notepad_Phil

JohnWinder said:
...

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.

Though you do start with shorter hair to begin with if you currently go the annuity route  

Personally I think that RPI linked annuities in later life can be useful, its just a pity that they're so expensive and I doubt that's going to change anytime soon. For us in our very early sixties, our current plan is to defer Mrs Notepad's state pensions for several years when it comes and only at the earliest consider annuities once we're in our late seventies.

westv

Getting back to annuities for the moment, where do we see rates being at in 12 months time. Yes, I know nobody can know for certain.

Thrugelmir

westv said:

Getting back to annuities for the moment, where do we see rates being at in 12 months time. Yes, I know nobody can know for certain.

Six months ago maturity yield on 50 year UK Government bonds was 1.12%. Today it's 1.75%.  Shows how quickly the weather can change in the markets. 

itzeazy21

Thank you for the information on annuities and related

JohnWinder

Personally I think that RPI linked annuities in later life can be useful, its just a pity that they're so expensive and I doubt that's going to change anytime soon. 

Jim Otar, engineer turned personal finance writer, has a nice take on it in his book Understanding the retirement myth. If you have stacks of retirement money (by which he means a very conservative SWR), then an annuity is a waste of money. And if you too little money to be able to afford an annuity that pays what you need in retirement, then you can’t afford one. But folks in between have the dilemma of whether to annuitise, partly or wholly.

westv

Thrugelmir said:

westv said:

Getting back to annuities for the moment, where do we see rates being at in 12 months time. Yes, I know nobody can know for certain.

Six months ago maturity yield on 50 year UK Government bonds was 1.12%. Today it's 1.75%.  Shows how quickly the weather can change in the markets. 

I'll put that in the "I have no idea" pile. 

Thrugelmir

westv said:

Thrugelmir said:

westv said:

Getting back to annuities for the moment, where do we see rates being at in 12 months time. Yes, I know nobody can know for certain.

Six months ago maturity yield on 50 year UK Government bonds was 1.12%. Today it's 1.75%.  Shows how quickly the weather can change in the markets. 

I'll put that in the "I have no idea" pile. 

I'd hazard a guess at a minimum BOE base rate of 2.25% - 2.75% in 12 months time. With 50 year gilts yielding in excess of 3%. Nor will major Central Banks have achieved their objective of bringing inflation back to 2% levels within 2 years. The genie is out of the bottle. 

michaels

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Getting back to annuities for the moment, where do we see rates being at in 12 months time. Yes, I know nobody can know for certain.

Six months ago maturity yield on 50 year UK Government bonds was 1.12%. Today it's 1.75%.  Shows how quickly the weather can change in the markets. 

I'll put that in the "I have no idea" pile. 

I'd hazard a guess at a minimum BOE base rate of 2.25% - 2.75% in 12 months time. With 50 year gilts yielding in excess of 3%. Nor will major Central Banks have achieved their objective of bringing inflation back to 2% levels within 2 years. The genie is out of the bottle. 

Depends to what extent near term inflation impacts on the 50 year expectation, I can see the curve becoming inverted as the current commodity driven price spike feeds through into a 'real' recession.

michaels

But the above discussion on variable annuity rates makes me wonder if one should 'drip fed' any annuity purchases as one might do with putting lump sums into the stock market.  Why lock in a 2% (forever) index linked annuity with your entire pot today if you might be able to lock in 3% forever in a years time?  Perhaps safest to split the transaction into 5 annual tranches to get a blended rate?