Private Pension Lifestyling investments - the next scandal?

Pat38493

zagfles said:

michaels said:

One thing with annuities - befroe they made vary little sense compared to 'swr', now they are relatively much more competitive.  So perhaps the markets are trying to tell us something and that 'lifestyling' was actually effective in what it was hoping to achieve.

And those who were going to drawdown may have hit the jackpot as they didn't move to fixed interest, yet now see RPI annuities at 3.3% for a 55 year old and 4.5% for a 65 year old, so why bother drawing down with a 3-4% "SWR" when you can get an annuity for similar or better?

I'll have to have a look at this as I have no really considered annuities up to now.  I was thinking this the other day that in average times, I would intuitively hope, that the payout rate on an inflation linked annuity would be something in the ball park of the achievable withdrawal rate for an slightly below average historical scenario.  Until recently it seemed like it was below even the worst case scenario, so I didn't pay much attention at that time.  The figures you are quoting are more in the ball park I would think they "should" be.

Albermarle

zagfles said:

michaels said:

One thing with annuities - befroe they made vary little sense compared to 'swr', now they are relatively much more competitive.  So perhaps the markets are trying to tell us something and that 'lifestyling' was actually effective in what it was hoping to achieve.

And those who were going to drawdown may have hit the jackpot as they didn't move to fixed interest, yet now see RPI annuities at 3.3% for a 55 year old and 4.5% for a 65 year old, so why bother drawing down with a 3-4% "SWR" when you can get an annuity for similar or better?

One reason is I guess so you can hopefully leave any remaining pension pot as a legacy, and/or later start taking more than 4% if the markets are kind.
Overall though it has for sure become more of a fine balance between annuities and drawdown.

Albermarle

This article seems quite relevant to the thread .

Pension freedom saved millions from locking into annuities at poverty rates - now we must fix one-size-fits-all default funds, says ROS ALTMANN (msn.com)

artyboy

zagfles said:

michaels said:

One thing with annuities - befroe they made vary little sense compared to 'swr', now they are relatively much more competitive.  So perhaps the markets are trying to tell us something and that 'lifestyling' was actually effective in what it was hoping to achieve.

And those who were going to drawdown may have hit the jackpot as they didn't move to fixed interest, yet now see RPI annuities at 3.3% for a 55 year old and 4.5% for a 65 year old, so why bother drawing down with a 3-4% "SWR" when you can get an annuity for similar or better?

If it ever hits 5% at age 57 then it's something that just might be worth considering for either mine or Mrs Arty's pot, while keeping the other in drawdown (for the "passing on to kids" strategy). 

I've mentioned it before on a seperate thread talking about the mindset of moving to decumulation, but unfortunately Mrs Arty is a perpetual worrier that we will end up in the poorhouse (despite ample evidence to the contrary), and I want to make sure that I've got things like my long haul business class travel privileges locked in rather than end up the richest corpse in the cemetery. 

It's just possible that an annuity might get us there in terms of that mindset shift. Besides, she's bound to live to be 110 

Pat38493

Albermarle said:

zagfles said:

michaels said:

One thing with annuities - befroe they made vary little sense compared to 'swr', now they are relatively much more competitive.  So perhaps the markets are trying to tell us something and that 'lifestyling' was actually effective in what it was hoping to achieve.

And those who were going to drawdown may have hit the jackpot as they didn't move to fixed interest, yet now see RPI annuities at 3.3% for a 55 year old and 4.5% for a 65 year old, so why bother drawing down with a 3-4% "SWR" when you can get an annuity for similar or better?

One reason is I guess so you can hopefully leave any remaining pension pot as a legacy, and/or later start taking more than 4% if the markets are kind.
Overall though it has for sure become more of a fine balance between annuities and drawdown.

The other reason is very simply flexibility as advertised by the term "flexible drawdown" I guess - I have the options open to go part time working and draw on a bit of my pot, go back to work or take a short term contract.  If I have taken a lifetime annuity in the meantime it will mean that I couldn't optimise my tax scenarios for those possibilities.  Also you may want to flex your spending to different levels in early vs mid vs later retirement, or continue to pay a mortgage for the first x years.  

zagfles

Pat38493 said:

Albermarle said:

zagfles said:

michaels said:

One thing with annuities - befroe they made vary little sense compared to 'swr', now they are relatively much more competitive.  So perhaps the markets are trying to tell us something and that 'lifestyling' was actually effective in what it was hoping to achieve.

And those who were going to drawdown may have hit the jackpot as they didn't move to fixed interest, yet now see RPI annuities at 3.3% for a 55 year old and 4.5% for a 65 year old, so why bother drawing down with a 3-4% "SWR" when you can get an annuity for similar or better?

One reason is I guess so you can hopefully leave any remaining pension pot as a legacy, and/or later start taking more than 4% if the markets are kind.
Overall though it has for sure become more of a fine balance between annuities and drawdown.

The other reason is very simply flexibility as advertised by the term "flexible drawdown" I guess - I have the options open to go part time working and draw on a bit of my pot, go back to work or take a short term contract.  If I have taken a lifetime annuity in the meantime it will mean that I couldn't optimise my tax scenarios for those possibilities.  Also you may want to flex your spending to different levels in early vs mid vs later retirement, or continue to pay a mortgage for the first x years.  

Yup there'll be lots of scenarios like this, personally I'm looking at an annuity to cover just core spending requirements together with DB and state pension, and will still use drawdown to top up esp before state pension age. So I don't need to worry about "SWR"s as I have my "safe" income already. 

OldScientist

Hopefully some food for thought on considering annuities...

Life expectancy (LE), the age for which there is a probability of 25% or 10% of reaching, and the probability of reaching 100yo is (data from https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 )

Age    LE   25%  10%   100

M55   84    92      97     3.8%

M65   85    92      96     2.9%

F55    87    94      99     6.6%

F65    87    94      98     5.3%

MF55                          10.1%

MF65                            8.0%

The value under the heading ‘100’ for MF couple is the probability of at least one of the couple being alive at that age and given (in %) by 100*(1-(1-P1/100)*(1-P2/100)) where P1 and P2 are the percentages in the table for Partners 1 and 2, respectively. For same sex couples, the probability is a bit lower for males and a bit higher for females.

If aiming at a longevity risk of about 10%, then couples would plan to about 100 and single retirees to about 96-99 years old, depending on age and sex. If willing to accept more longevity risk then use lower values (e.g. for 25% probability, use 92-94 for single retiree and about 95 for couples) and vice versa.

The following table gives the UK MSWR in % (i.e., the highest constant inflation adjusted withdrawal that had no failures over the planning horizon – rounded down to the nearest 10 basis points) with various stock allocations (fixed income is entirely bonds). The values were derived from https://www.2020financial.co.uk/pension-drawdown-calculator/

               Planning horizon (years)

Stocks (%) 25  30  35  40  45

40              2.8 2.5 2.2 2.1 2.0

60              3.2 2.9 2.6 2.5 2.3

80              3.4 3.2 3.0 2.8 2.7

100            3.6 3.4 3.1 3.0 2.7

Notes: No fees (subtract approx 10 basis points per 20 basis points of fees)

UK assets – add approx 20 basis points for holding a global portfolio (possibly more than this for higher stock allocations).

These are annual data – monthly data could be 20-50 basis points less (worse with higher stock allocation).

Just as an example, a 65 year old couple with a 35 year planning horizon (i.e., to 100yo) might plan for an MSWR of somewhere between 2.2% to 3.1% depending on their stock allocation (note there is only a small difference between 80% and 100% for this case).

Single life RPI annuity at 65yo has payout rate of 4.5% (https://www.hl.co.uk/retirement/annuities/best-buy-rates, 22 June – with 5 year guarantee)

Joint life (50% survivor benefits) 3.7% (moneyhelper annuity tool, 20 June, no guarantee, but a 10 year guarantee lowered the payout rate by under 10 basis points)

Joint life (100% survivor benefits) 3.5%

Our resident IFAs are confident of getting annuity payout rates a bit better than these generic ones.

Pat38493

OldScientist said:

Hopefully some food for thought on considering annuities...

Life expectancy (LE), the age for which there is a probability of 25% or 10% of reaching, and the probability of reaching 100yo is (data from https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 )

Age    LE   25%  10%   100

M55   84    92      97     3.8%

M65   85    92      96     2.9%

F55    87    94      99     6.6%

F65    87    94      98     5.3%

MF55                          10.1%

MF65                            8.0%

The value under the heading ‘100’ for MF couple is the probability of at least one of the couple being alive at that age and given (in %) by 100*(1-(1-P1/100)*(1-P2/100)) where P1 and P2 are the percentages in the table for Partners 1 and 2, respectively. For same sex couples, the probability is a bit lower for males and a bit higher for females.

If aiming at a longevity risk of about 10%, then couples would plan to about 100 and single retirees to about 96-99 years old, depending on age and sex. If willing to accept more longevity risk then use lower values (e.g. for 25% probability, use 92-94 for single retiree and about 95 for couples) and vice versa.

The following table gives the UK MSWR in % (i.e., the highest constant inflation adjusted withdrawal that had no failures over the planning horizon – rounded down to the nearest 10 basis points) with various stock allocations (fixed income is entirely bonds). The values were derived from https://www.2020financial.co.uk/pension-drawdown-calculator/

               Planning horizon (years)

Stocks (%) 25  30  35  40  45

40              2.8 2.5 2.2 2.1 2.0

60              3.2 2.9 2.6 2.5 2.3

80              3.4 3.2 3.0 2.8 2.7

100            3.6 3.4 3.1 3.0 2.7

Notes: No fees (subtract approx 10 basis points per 20 basis points of fees)

UK assets – add approx 20 basis points for holding a global portfolio (possibly more than this for higher stock allocations).

These are annual data – monthly data could be 20-50 basis points less (worse with higher stock allocation).

Just as an example, a 65 year old couple with a 35 year planning horizon (i.e., to 100yo) might plan for an MSWR of somewhere between 2.2% to 3.1% depending on their stock allocation (note there is only a small difference between 80% and 100% for this case).

Single life RPI annuity at 65yo has payout rate of 4.5% (https://www.hl.co.uk/retirement/annuities/best-buy-rates, 22 June – with 5 year guarantee)

Joint life (50% survivor benefits) 3.7% (moneyhelper annuity tool, 20 June, no guarantee, but a 10 year guarantee lowered the payout rate by under 10 basis points)

Joint life (100% survivor benefits) 3.5%

Our resident IFAs are confident of getting annuity payout rates a bit better than these generic ones.

What do you mean by "these are annual data"?  You mean it's only looking at calendar years for someone retiring on 1st January, or you mean the withdrawals are per year?

UK Assets - I doubt many of us are only in UK assets right now - in fact I'm more inclined to minimise my UK assets if anything!

But in any case, based on this data, it looks like as of today, annuities are looking pretty good, at least compared to minimum safe withdrawal rates.  You could argue though that to have a full picture, you should also look at the "average or median" withdrawal rate across all the years that you could have had.  I am not sure if this is possible.  Looking at a couple of tools I have, it looks like the withdrawal rates that approach 50% failure are in the 5 to 5.5% area.  Of course in reality nobody would target a 50% failure initially.  4.5% WR gave around 24% failure rate (in a spreadsheet that's a bit more optimistic than your data as using US data).

Also are these annuities fully adjusted with RPI or capped?

I guess the other question is, should we conclude from this that the experts who set the prices for annuities, believe that MSWRs are too low compared to the situation retirees face today? i.e. we are not in the worst case place right now.

arnoldy

OldScientist said:

Hopefully some food for thought on considering annuities...

Life expectancy (LE), the age for which there is a probability of 25% or 10% of reaching, and the probability of reaching 100yo is (data from https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 )

Age    LE   25%  10%   100

M55   84    92      97     3.8%

M65   85    92      96     2.9%

F55    87    94      99     6.6%

F65    87    94      98     5.3%

MF55                          10.1%

MF65                            8.0%

But when I log on to annuity "best buy" it does not seem to distinguish between Male and Female? Surely the Males should be higher as the payout time is less - so the area under the curve is the same male or female.

Annuity Rates: View Best Annuity Rates from the UK Market (hl.co.uk)

zagfles

OldScientist said:

Hopefully some food for thought on considering annuities...

Life expectancy (LE), the age for which there is a probability of 25% or 10% of reaching, and the probability of reaching 100yo is (data from https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 )

Age    LE   25%  10%   100

M55   84    92      97     3.8%

M65   85    92      96     2.9%

F55    87    94      99     6.6%

F65    87    94      98     5.3%

MF55                          10.1%

MF65                            8.0%

Off on a bit of a tangent here but I was puzzled by 65 year olds having an apparently lower chance of reaching 100 than 55 year olds, doesn't really make sense, LE at 65 should be higher than 55 since some people will die between those ages. But a bit of playing with the figures suggests they are assuming big increases in life expectancy for younger people, it seems a 15 year old boy has a 10.5% chance of reaching 100 and a 15 year old girl 15.3%!

So not only are they assuming a big increase in LE in the future but also that the gender LE gap will remain significant.