Annuities

westv

Linton said:

 HL gives the fixed annuity rate at 75 as 8% and an RPI annuity at 5.5% when male life expectancy is 12 years.  On the same basis the fixed annuity rate at 85 with a life expectancy of 6 years would be 16% with an index linked annuity at perhaps 13-14%%.  These figures are much better than the cost of self-insuring for death at 95, never mind 100.

Those are single life figures.
Do we know what percentage of annuities were single life back in the day?

Linton

westv said:

Linton said:

 HL gives the fixed annuity rate at 75 as 8% and an RPI annuity at 5.5% when male life expectancy is 12 years.  On the same basis the fixed annuity rate at 85 with a life expectancy of 6 years would be 16% with an index linked annuity at perhaps 13-14%%.  These figures are much better than the cost of self-insuring for death at 95, never mind 100.

Those are single life figures.
Do we know what percentage of annuities were single life back in the day?

Looking at HL's data, a joint 50% life fixed annuity at 75 is 7% as opposed to 8% for a single life.  So it doesnt make much difference to the principle.  Also of course the chances are that at 85 one would only need a single life annuity.

bostonerimus

bostonerimus said:

Previous pension regimes where you had to buy an annuity were restrictive, but the preeminence of the DC solution today is being shown to have its own issues when growth stalls, inflation kicks up and stock markets fall. A hybrid solution is probably the best for most people.

I'll quote myself hear and mention Linton's comments about longevity insurance. The question is what is mean by the "best" solution. Is it the one that leaves you possibly the richest at death, or the one that lets you sleep most soundly? The answers can only be known in hindsight, but we can make educated guesses and moderate over exuberance with a little caution.

OldScientist

Just for interest here are the values for single life and joint life with 50% survivor benefit (both the same age) with a mix of quotes from https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/compare-annuities, and from HL, and my own calculations. Also presented is the maximum safe withdrawal rate (MSWR), i.e. zero historical failures, for a UK portfolio (see https://www.2020financial.co.uk/pension-drawdown-calculator/) with 55% stocks and 45% bonds planning for a retirement until aged 100 (i.e. at 65 this will be 35 years, at 70 it will be 30 years, etc.)

			Age
	65	70	75	80	85
Single life, RPI	3.3	4.2	5.5	7.4	10.5
Joint, 50%, RPI	2.9	3.6	4.7	6.2	8.8
MSWR (55/45) to 100	2.8	3.0	3.2	3.7	4.6

Several things to note from the table:
1) the annuity rates go up faster than MSWR does with age
2) Whether a delay in purchasing an annuity was worth it depends on the the value of the portfolio at the later age. For example, spending half of a 100k portfolio at 65 would produce an annual real income (joint, 50%) of £1450, to produce an income of at least that (in real terms) with half the portfolio at 70 would require the portfolio to be worth at least £80k in real terms (i.e. 40*0.036=£1440). A drop of more than 20% in real terms over 5 years has not been too uncommon in UK history.

I also note that the RPI annuities appear to become increasing unfairly priced with advancing age (assuming the ONS life tables) since the required interest rate to reproduce the rates is about -2.6% at 65 and -5.7% at 85. I suspect this is a combination of reducing bond maturities, the difference between actuarial life tables and the ONS ones, and fees.

In principal a couple could buy a single life annuity each rather than a joint one since this would give greater income while they both lived (after the death of one, the income would halve, but the expenditure would also reduce, but probably not by as much as half).

dunstonh

I would be on guard with using generic tables as they often understate the actual annuity rate.

I got an annuity quote last week for a 67 year old, single RPI (no cap) with 100% value protect with no upper age limit and it was 4.03%. (level was 6.06%).  Not far off the figures mentioned above but these included value protect.    We didn't buy but I would not be surprised if we did in a couple of years, for that particular person if the recent trend was to continue.   

bostonerimus

I would imagine that for most people using a 5 year savings bond ladder will continue to be a better financial outcome than an index linked annuity. The advantage of the annuity is it's mortality credit and longevity insurance component, but you have to live long enough to collect on those.

Linton

bostonerimus said:

I would imagine that for most people using a 5 year savings bond ladder will continue to be a better financial outcome than an index linked annuity. The advantage of the annuity is it's mortality credit and longevity insurance component, but you have to live long enough to collect on those.

What is "a better financial outcome" given you dont know and have little control over your date of death? Your advantage of buying an annuity is the whole reason to do so - ensure you have an acceptable standard of living until you die, whenever that may be.  Any other way of achieving that aim is likely to be less successful or more expensive.  What age of death are you going to assume for determining the size of your bond ladder?

OldScientist

dunstonh said:

I would be on guard with using generic tables as they often understate the actual annuity rate.

I got an annuity quote last week for a 67 year old, single RPI (no cap) with 100% value protect with no upper age limit and it was 4.03%. (level was 6.06%).  Not far off the figures mentioned above but these included value protect.    We didn't buy but I would not be surprised if we did in a couple of years, for that particular person if the recent trend was to continue.   

Thanks - useful information and an excellent rate with value protect.

There are clearly variations between postcode (up to 5% difference) and between insurance companies (up 20% from highest to lowest) - as an IFA you may very well have better access to 'whole of market' than moneyhelper (which I have read is quite limited) or, perhaps less likely, HL. With fairly rapid changes in the gilt rates, I guess different companies update their prices at different times. And, there is the effect of health.

OldScientist

Linton said:

bostonerimus said:

I would imagine that for most people using a 5 year savings bond ladder will continue to be a better financial outcome than an index linked annuity. The advantage of the annuity is it's mortality credit and longevity insurance component, but you have to live long enough to collect on those.

What is "a better financial outcome" given you dont know and have little control over your date of death? Your advantage of buying an annuity is the whole reason to do so - ensure you have an acceptable standard of living until you die, whenever that may be.  Any other way of achieving that aim is likely to be less successful or more expensive.  What age of death are you going to assume for determining the size of your bond ladder?

Just to compare like with like, a 65 year old could construct a 25 year ladder using index-linked gilts (spot rate currently about -1%) with a payout rate of 3.5% (i.e. just better than an inflation-linked annuity). This would provide slightly higher income and provide a legacy in the event of early death, but income would fall to zero in 25 years time.

Something similar could be done with a nominal bond ladder (spot rate about 3%) with a length slightly less than 25 years to match the current annuity payout rate.

In either case, the 65 year old, regardless of gender, has a slightly better than even chance of expiring before the ladder does. Personally, I'm not sure I'd take those odds (although that may be because I am quite risk averse).

westv

OldScientist said:

dunstonh said:

I would be on guard with using generic tables as they often understate the actual annuity rate.

I got an annuity quote last week for a 67 year old, single RPI (no cap) with 100% value protect with no upper age limit and it was 4.03%. (level was 6.06%).  Not far off the figures mentioned above but these included value protect.    We didn't buy but I would not be surprised if we did in a couple of years, for that particular person if the recent trend was to continue.   

Thanks - useful information and an excellent rate with value protect.

There are clearly variations between postcode (up to 5% difference) and between insurance companies (up 20% from highest to lowest) - as an IFA you may very well have better access to 'whole of market' than moneyhelper (which I have read is quite limited) or, perhaps less likely, HL. With fairly rapid changes in the gilt rates, I guess different companies update their prices at different times. And, there is the effect of health.

Way back when were there just two rates male/female based on age or more variations?