Private Pension Lifestyling investments - the next scandal?

zagfles

arnoldy said:

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)

Sex discrimination is illegal in insurance and probably all financial products, same for life insurance, car insurance, and for stuff like workplace pensions etc

zagfles

Pat38493 said:

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.

MSWRs are usually based on having equity investments, whereas (normal) annuities use gilts, index linked gilts for RPI annuities. So they basically pool longevity risk but without investment risk.

arnoldy

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)

Sex discrimination is illegal in insurance and probably all financial products, same for life insurance, car insurance, and for stuff like workplace pensions etc

Ok thanks but a male at 65 gets 20 years, a female at 65 gets 22 years - 10% more. Presumably that means it is worth thinking about an annuity tilt to towards the wife rather than the husband, other things being equal if the couple are going to have a mix of annuity and drawdown/DB.

Mick70

just had a look at my DC pension 
it is Royal London - "Retirement Solutions Group Personal Pension Plan"  , we didnt really get any say was just told by the MD we were in it .  I have noticed it quotes a retirement date (65th birthday) - is it best I let them know I plan on retiring well before that age ?  it states that that the portfolio changes as i approach retirement age - is that normal , or a red flag ?

Pat38493

Mick70 said:

just had a look at my DC pension 
it is Royal London - "Retirement Solutions Group Personal Pension Plan"  , we didnt really get any say was just told by the MD we were in it .  I have noticed it quotes a retirement date (65th birthday) - is it best I let them know I plan on retiring well before that age ?  it states that that the portfolio changes as i approach retirement age - is that normal , or a red flag ?

That's kind of what this whole thread is supposed to be about.   What that means is that you are in a life styling approach.

You need to know how many years before retirement they will move you more into bonds.  If you set your retirement age to an earlier year, it will trigger that change earlier.  I have deliberately left mine at 65 even though I plan to retire earlier as I don't want it to change and I am actually now in the process of transferring the fund to a non life style option.

Beyond that it depends on your intentions at retirement (drawdown vs annuity etc) and whether you think it's a good idea to go heavy into bonds at retirement - different opinions exist on that but most IFAs in the UK I think would veer towards move you into bonds at least to some extent at retirement, albeit maybe at a lesser rate than some life style funds.

FWIW I was listening to the meaningful money podcast recently and one of the advice points they gave was "switch off life styling on your investments" and take control of what it's doing yourself.

OldScientist

Pat38493 said:

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.

Annual data: In the Barclay's dataset (that the calculator is using) there is one return value for each year - I don't have access to monthly UK data, but starting US retirements in different months (with monthly data) can change the MSWR by up to about 70 basis points (for 100% stocks) or 20-30 basis points (80% stocks or below).

The annuity rates were for full RPI annuities (interestingly, ones capped at 5% had payout rates almost exactly the same as the fully protected ones).

OldScientist

zagfles said:

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.

Seems odd doesn't it - but the ONS are assuming increases in longevity for younger generations (in the same way that current 65 year olds are projected to live longer than those who were 65 years old 30 years ago). However, the projected improvement in longevity has been revised downwards over the last decade or so (and there are some areas in the UK where life expectancy is now declining).

OldScientist

arnoldy said:

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)

Sex discrimination is illegal in insurance and probably all financial products, same for life insurance, car insurance, and for stuff like workplace pensions etc

Ok thanks but a male at 65 gets 20 years, a female at 65 gets 22 years - 10% more. Presumably that means it is worth thinking about an annuity tilt to towards the wife rather than the husband, other things being equal if the couple are going to have a mix of annuity and drawdown/DB.

Yes, annuity prices became gender neutral in 2012(?) or so. And yes, single life annuities are a better buy for females than males.

Pat38493

OldScientist said:

Pat38493 said:

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.

Annual data: In the Barclay's dataset (that the calculator is using) there is one return value for each year - I don't have access to monthly UK data, but starting US retirements in different months (with monthly data) can change the MSWR by up to about 70 basis points (for 100% stocks) or 20-30 basis points (80% stocks or below).

The annuity rates were for full RPI annuities (interestingly, ones capped at 5% had payout rates almost exactly the same as the fully protected ones).

Also if you are after a fixed term annuity to cover say a 10 or 12 year bridging period till SP/DB or whatever, I requested a quote online and it didn't look that good to me compared to the withdrawal rate models I am using - it felt like it was well into the bottom quartile of possible withdrawal rates that would have been achieved.

Mick70

Pat38493 said:

Mick70 said:

just had a look at my DC pension 
it is Royal London - "Retirement Solutions Group Personal Pension Plan"  , we didnt really get any say was just told by the MD we were in it .  I have noticed it quotes a retirement date (65th birthday) - is it best I let them know I plan on retiring well before that age ?  it states that that the portfolio changes as i approach retirement age - is that normal , or a red flag ?

That's kind of what this whole thread is supposed to be about.   What that means is that you are in a life styling approach.

You need to know how many years before retirement they will move you more into bonds.  If you set your retirement age to an earlier year, it will trigger that change earlier.  I have deliberately left mine at 65 even though I plan to retire earlier as I don't want it to change and I am actually now in the process of transferring the fund to a non life style option.

Beyond that it depends on your intentions at retirement (drawdown vs annuity etc) and whether you think it's a good idea to go heavy into bonds at retirement - different opinions exist on that but most IFAs in the UK I think would veer towards move you into bonds at least to some extent at retirement, albeit maybe at a lesser rate than some life style funds.

FWIW I was listening to the meaningful money podcast recently and one of the advice points they gave was "switch off life styling on your investments" and take control of what it's doing yourself.

Mine has retirement age of 65 (2035) and I plan to retire about 2027, so no need to panic yet ? I had been going to contact them about the retirement date to say it was too old but will leave it now. Unsure if I should contact royal London about it though .  

Are they able to switch it somehow ?