Standard Life Annuity Purchase Fund - What's Going On

drlabman

One of my workplace pensions is (partly) invested in Standard Life's Annuity Purchase Fund.  I presume it's migrated to this fund because I'm close to retirement (in fact I'm currently deferred).  Can anyone explain to me in layman's terms why this fund has done so poorly lately?  I realise investments can go down as well as up but I thought that the idea of targeted funds is that they become less volatile closer to retirement.  This fund has been falling steadily since the middle of 2020, but it took a huge drop earlier this year.  What's going on?

HappyHarry

The fund will be heavily invested in government bonds. These tend to fall in capital value as interest rates rise. However, the annuity income you can purchase also tends to rise in value when interest rates rise. The purpose of the fund is to protect the annuity income that you could purchase at retirement. So as your fund falls, so the annuity income you can purchase rises and vice versa.

Albermarle

These funds go into normally safer gilts and bonds rather than equities ( shares) . 2022 was an unusual year where bonds/gilts did not do their usual job and crashed badly.
Bonds /Gilts did well in the very low interest rate environment of previous years, but were inevitably going to be badly hurt by interest rate rises.
On the positive side if you are going to buy an annuity, the annuity rates have improved significantly for the same reasons. So would probably balance out.

arnoldy

HappyHarry said:

The fund will be heavily invested in government bonds. These tend to fall in capital value as interest rates rise. However, the annuity income you can purchase also tends to rise in value when interest rates rise. The purpose of the fund is to protect the annuity income that you could purchase at retirement. So as your fund falls, so the annuity income you can purchase rises and vice versa.

The industry tends to put out the propaganda that because the annuity rates increase as your fund drops it does not matter. This conveniently ignores 10% inflation, and the fact that if you just had the money "under the mattress" the annuity would be far far bigger.

The vast majority of annuities are very dangerous products (for the customer not the Industry), that is because they are sold as "safe" and mitigate "longevity risks" but probably <<< 1% are inflation proofed with full spouse benefits. Go figure a product designed to last the rest of your life without inflation proofing.

dunstonh

Can anyone explain to me in layman's terms why this fund has done so poorly lately?

95% of the time, investment areas will perform within their normal expected volatility range.  5% of the time, they will be outside of that.     2022 had two events that would fall within that 5%.    A lining up of events that created the perfect storm.

The industry tends to put out the propaganda that because the annuity rates increase as your fund drops it does not matter. 

It is true that the rise in annuity rates has largely offset the drop in gilts that caused values to fall.

This conveniently ignores 10% inflation, and the fact that if you just had the money "under the mattress" the annuity would be far far bigger.

its not about inflation though.    No short term option has the ability to guarantee it can beat inflation.

The vast majority of annuities are very dangerous products (for the customer not the Industry), that is because they are sold as "safe" and mitigate "longevity risks" but probably <<< 1% are inflation proofed with full spouse benefits. Go figure a product designed to last the rest of your life without inflation proofing.

Yet are loss-making for most of those that offered them.

And for many people, level annuities can make perfect sense.

drlabman

Thanks everyone.  That makes sense.  I just checked the value of my fund and it's gone down even since the annual report at the end April.

Now, if you were me, what would you do?  I've set my target retirement date for later this year but I don't really need the money from this pension (I have others).  Should I defer further in the hope that the fund recovers (it's only going one way at the moment)?  I guess that's like asking for next week's lottery numbers.

xylophone

If you are happier with the performance of your other pensions, had you considered a transfer in (if possible) to one of the other schemes?

HappyHarry

arnoldy said:

HappyHarry said:

The fund will be heavily invested in government bonds. These tend to fall in capital value as interest rates rise. However, the annuity income you can purchase also tends to rise in value when interest rates rise. The purpose of the fund is to protect the annuity income that you could purchase at retirement. So as your fund falls, so the annuity income you can purchase rises and vice versa.

The industry tends to put out the propaganda that because the annuity rates increase as your fund drops it does not matter. This conveniently ignores 10% inflation, and the fact that if you just had the money "under the mattress" the annuity would be far far bigger.

The vast majority of annuities are very dangerous products (for the customer not the Industry), that is because they are sold as "safe" and mitigate "longevity risks" but probably <<< 1% are inflation proofed with full spouse benefits. Go figure a product designed to last the rest of your life without inflation proofing.

Are you are aware that annuities have inflation linked options as well as spouses benefits?

Annuities are not dangerous products, in fact they are an incredibly safe product for those that are risk averse. If an individual chooses a non-inflation linked single life annuity, then yes, it would often be a poor choice. This is one reason why taking advice on annuity options would be beneficial for many retirees. Another reason to take advice of course is that advisers will usually be able to get better rates than the individual can.

To call annuities "very dangerous products" is really a little daft and over dramatic.

drlabman

xylophone said:

If you are happier with the performance of your other pensions, had you considered a transfer in (if possible) to one of the other schemes?

Unfortunately, that's not an option.  One of my pensions is foreign and the other UK one is already a deferred annuity.

OldScientist

arnoldy said:

HappyHarry said:

The fund will be heavily invested in government bonds. These tend to fall in capital value as interest rates rise. However, the annuity income you can purchase also tends to rise in value when interest rates rise. The purpose of the fund is to protect the annuity income that you could purchase at retirement. So as your fund falls, so the annuity income you can purchase rises and vice versa.

The industry tends to put out the propaganda that because the annuity rates increase as your fund drops it does not matter. This conveniently ignores 10% inflation, and the fact that if you just had the money "under the mattress" the annuity would be far far bigger.

The vast majority of annuities are very dangerous products (for the customer not the Industry), that is because they are sold as "safe" and mitigate "longevity risks" but probably <<< 1% are inflation proofed with full spouse benefits. Go figure a product designed to last the rest of your life without inflation proofing.

On your second point, there are probably a number of reasons why so few inflation linked annuities have been sold in recent years:

1) Inflation higher than 5% was a distant memory (late 1980s and early 1990s for CPIH, and briefly came close to touching 5% in September 2008) and the current levels of high inflation were largely unexpected.
2) Until recently, annuity rates were pretty dreadful (e.g. in January 2021, the payout rate on a single life RPI linked annuity for a 65yo was 2.8% compared, at the time, to 5.0% for a level annuity)
3) The difference in level rates compared to RPI rates - even now with rates of 4.4% and 6.8% (according to https://www.hl.co.uk/retirement/annuities/best-buy-rates ) , mean that for many people taking more money now than later is tempting while only 2 years ago, you would have got nearly twice as much income with a level annuity.
4) Coupled with Point 3 is that people often tend to underestimate how long they are going to live for (e.g. there is just under a 10% chance that one or other or both of a 65 year couple will live to 100 - so planning for a 30-35 year retirement might be prudent). However, even with inflation at 'only' 5% it takes 10 years for the real income from the level annuity to fall below that of the RPI annuity with current rates (although 16 years for 3% inflation).

All of which suggests that there is a need for education, the provision of which at least is improving (e.g. https://www.moneyhelper.org.uk/en/pensions-and-retirement and, of course, this forum and site). The problem is that, for most people, the details of pension planning are not all that interesting (at least until close to retirement)!

And to be fair to pension providers (like Standard Life) a lifestyling option (which does have 'annuity purchase' in the title) is never going to be the best option in all market circumstances. Your are correct, over the last year or so, keeping it under the mattress would have been better than investing in either bonds or stocks, but few predicted that beforehand and it would have required active management.

zagfles

dunstonh said:

Can anyone explain to me in layman's terms why this fund has done so poorly lately?

95% of the time, investment areas will perform within their normal expected volatility range.  5% of the time, they will be outside of that.     2022 had two events that would fall within that 5%.    A lining up of events that created the perfect storm.

The industry tends to put out the propaganda that because the annuity rates increase as your fund drops it does not matter. 

It is true that the rise in annuity rates has largely offset the drop in gilts that caused values to fall.

That's the theory, but not sure annuity rates have risen quite in line with drops in gilts

This conveniently ignores 10% inflation, and the fact that if you just had the money "under the mattress" the annuity would be far far bigger.

its not about inflation though.    No short term option has the ability to guarantee it can beat inflation.

Wrong. You can buy short dated index linked gilts with positive real yields now.

The vast majority of annuities are very dangerous products (for the customer not the Industry), that is because they are sold as "safe" and mitigate "longevity risks" but probably <<< 1% are inflation proofed with full spouse benefits. Go figure a product designed to last the rest of your life without inflation proofing.

Yet are loss-making for most of those that offered them.

And for many people, level annuities can make perfect sense.

What is "loss making" supposed to mean? If you mean ending up with a lower lifetime income, then so what? If you're after what will likely get you the highest lifetime income, you'd be using drawdown invested in equities. But that's a risk. Level annuities are also a risk. One is investment risk, the other is inflation risk. The main point of annuities is to avoid risk and get a safe guaranteed real income for life. Flat annuities don't achieve that.

Personally I have more faith in equities to maintain real value than the pound. So the only options I'd consider are drawdown investment mainly in equities, or an index linked annuity.