If I don't buy annuity, give me the name of 3 funds to do the same in a SIPP drawdown scenario

RogerPensionGuy

Some great posts on this thread, thanks all.

I'm pretty risk adverse and planning on using a good DB scheme as core income after work and state pension at 67(60 now)

I also have a sensible DC pot and was just going to cherry pick it for whenever I may need extra income, probably opting for a flexible drawdown and probably leaving value in it after I expire. 

I'm now currently thinking maybe I should use a % of my SIPP to buy an annuity as rates have increased just lately and this choice would probably mean taking cash outa the SIPP a very rare event. 

The question in my head now is when should I get annuity, now or probably wait a bit as I feel bank rates will top out Xmas this year and then only slowly reducing over 12/18  months and remain at the 5% range for the new few years.

Any views comments welcome. 

OldScientist

zagfles said:

OldScientist said:

zagfles said:

There are no funds that can do the same job as an annuity. Anyone who tells you there is doesn't know what they're talking about and should be ignored.

With the exception of duration matching with bond funds - e.g. see  https://occaminvesting.co.uk/duration-matching-in-practice for some details (from a UK perspective too!) or https://www.bogleheads.org/forum/viewtopic.php?t=240325 for a US perspective (where an absence of inflation linked annuities means they have to use a DIY approach).

There is no exception. You can't use "duration matching" or a gilts ladder etc if you don't know the duration required. So unless you know when you die, then it's not doing the same "job" as an annuity.

You can make reasonable assumptions about your lifespan, you can make reasonable assumptions about investment returns, interest rates etc, and other investments obviously have potential advantages over an annuity eg likelyhood of better returns, leaving an inheritance etc. But none will do the same job, ie a guaranteed income for the rest of your life.

AFAIK, there are no short duration inflation linked bond funds currently available in the UK, so an inflation linked ladder cannot be built with funds here.

Why use funds, you can just use a ladder of index linked gilts. That's easy enough to do if the duration is known, for instance if someone retires early and wants to cover the income gap between retirement and when the state pension/DB pensions kick in. 

However, because, unlike an annuity, a bond ladder (or two fund equivalent) does not include mortality credits, the payout rate will virtually always be below that of a single life annuity, but will be closer to that for joint life with 100% survivor benefits. The relatively low payout rate is also not helped by the requirement to build the ladder to the extreme end of longevity (e.g., to age 100). On the other hand, the capital (until spent) is available for legacy in the event of early death.

Well exactly. When you start comparing other investments with annuities you'll start looking at "worst case scenarios", what if you live a really long time, what if investments don't do well etc, then when you look at what the "safe" withdrawal rate is, you might find it's a lot less than an annuity would pay. These days you can get 3.8% index linked annuity at 60 or 4.6% at 65, how does that compare with "safe withdrawal rates"?

And even so called "safe withdrawal rates" seem to be based on the premise that the past will repeat itself, which period of the past is unknown but the future must be a repeat of some period in the past, therefore if we use the worst period in the past then we'll be "safe"! Who says the future will be anything like the past? Or that in 100 years time, when they look back, the "worst" period won't be eg 2023-2053. (Not that I believe this will happen, I have equity/bond investments, just that it's possible)

Reasonable estimates of lifespan would involve constructing the ladder out to 100 (currently an estimated 3%-5% chance of exceeding for a single 65yo) or 105 (less than 1% chance of exceeding) depending on how conservative you want to be. That would provide an almost guaranteed income for life (close enough to an annuity but not quite at the less than 1% chance - absent a significant increase in life expectancies). If the OP meant a fixed term annuity for 10 or 20 years (and it is not clear to me), then, in that case, the duration is known.

Why use funds? - because that is the question the OP asked and not all pension platforms allow the purchase of individual gilts (although that could be rectified by moving platform).

Your last comment is one I am in complete agreement with. Firstly, the 'safe' withdrawal rates used are not necessarily the appropriate ones, e.g. people here often quote the US value ('4% rule') for a 30 year retirement, rather than the lower UK values with horizons more age appropriate and secondly, as you point out, 'safe' means historically safe with no guarantees for the future.

AustinZ

Thanks for the replies, very informative..., as mentioned it is not possible to exactly duplicate an annuity by buying a few funds, I just wanted to get some ideas to follow a low risk income strategy in part of my SIPP.. - to somewhat satisfy my appetite of buying an annuity ! 

NedS

coastline said:

OldScientist said:

While the natural yield approach is a sound enough approach (and was commonly used when transaction fees were very high), it doesn't provide constant income in real terms and, like all portfolio based approaches, is highly dependent on 'history'. For another view (and I don't agree with his use of the term 'bonkers') see https://finalytiq.co.uk/natural-yield-totally-bonkers-retirement-income-strategy/ 

Coupling an annuity with the state pension to provide a floor of guaranteed income and using natural yield from the portfolio to provide a variable income on top is one way to go.

Anyway, as other have said, the conclusion is that using the natural yield from a FTSE100 tracker is not a replacement for an annuity.

From that link there's comments below . I've read it several times in the past but thanks anyway. Hobie explains what I've tried to use with the FTSE tracker and the BOE calculator . Today the FTSE yield is 3.88% slightly higher than the index linked of 3.4% . If it was 2% I wouldn't be posting all of this. We are entering at attractive levels which might get even better if the market goes lower. Who knows ? Now we concentrate on the income produced and history suggests , yes I know not guaranteed , that it will match or outpace inflation. 40 years of data with all the pitfalls in that time is a pretty good guide. Yes we're going around in circles I understand that but the OP is 57 yo and a 20 yr window. There's a good opportunity when markets go lower to pick up income producing funds etc. 

https://finalytiq.co.uk/natural-yield-totally-bonkers-retirement-income-strategy/ 

CTY is yielding 5.2%.

City of London Investment Trust PLC, UK:CTY Advanced Chart - (LON) UK:CTY, City of London Investment Trust PLC Stock Price - BigCharts.com (marketwatch.com)

Fundswire article | Trustnet

Another for my list ..Yield 3.69%

JPMorgan Global Growth & Income plc Ord Fund factsheet | Trustnet

The JPMorgan fund (JGGI) is not a genuine dividend yield fund, but one of a growing trend of funds that invests largely for long term growth but pays out an annual dividend equal to 4% of the Net Asset Value. So unlike CTY, the dividend could vary significantly depending on the fund NAV at the end of the financial year. Hence I see it as an alternative to managing a drawdown strategy yourself (rather than as an alternative to an annuity as discussed here) where the fund will automatically pay out 4% per year.

I am using CTY as the core of a more widely diversified income portfolio as an alternative to a fixed term annuity to bridge the gap between retirement and SP/DBs. I wanted the income but did not want to draw down on my capital (sell units/shares) over a relatively short 10 year period, and already have enough guaranteed fixed income after SPA so a natural yield approach seemed reasonable for my circumstances. I will likely transition towards a growth/drawdown strategy at or as I approach SPA to give me top up income as I need it and to provide a longer term legacy for my children.

MK62

It's certainly the case that over the last year annuities have become a much more "viable" retirement option for many.......one thing I'd add though is that it doesn't have to be a binary choice of annuity vs drawdown.......a mixed approach might well tick all the boxes for many too.......

Doctor_Who

MK62 said:

It's certainly the case that over the last year annuities have become a much more "viable" retirement option for many.......one thing I'd add though is that it doesn't have to be a binary choice of annuity vs drawdown.......a mixed approach might well tick all the boxes for many too.......

Agreed, and it's often applicable to many of the questions asked on this forum.

zagfles

MK62 said:

It's certainly the case that over the last year annuities have become a much more "viable" retirement option for many.......one thing I'd add though is that it doesn't have to be a binary choice of annuity vs drawdown.......a mixed approach might well tick all the boxes for many too.......

Indeed, for instance use an index linked annuity together with state pension and any DB pensions to give you a base inflation protected (mostly) income of the minimum you think you need, then you can invest the rest more freely drawdown/ISAs as that's extras which won't result in you starving if it does badly and could pay for a world cruise/Ferrari/kids inheritance or whatever if it does well. And if you need short term top up for instance between retirement and state/DB pension kicking in, use an index linked gilts ladder.

zagfles

OldScientist said:

zagfles said:

OldScientist said:

zagfles said:

There are no funds that can do the same job as an annuity. Anyone who tells you there is doesn't know what they're talking about and should be ignored.

With the exception of duration matching with bond funds - e.g. see  https://occaminvesting.co.uk/duration-matching-in-practice for some details (from a UK perspective too!) or https://www.bogleheads.org/forum/viewtopic.php?t=240325 for a US perspective (where an absence of inflation linked annuities means they have to use a DIY approach).

There is no exception. You can't use "duration matching" or a gilts ladder etc if you don't know the duration required. So unless you know when you die, then it's not doing the same "job" as an annuity.

You can make reasonable assumptions about your lifespan, you can make reasonable assumptions about investment returns, interest rates etc, and other investments obviously have potential advantages over an annuity eg likelyhood of better returns, leaving an inheritance etc. But none will do the same job, ie a guaranteed income for the rest of your life.

AFAIK, there are no short duration inflation linked bond funds currently available in the UK, so an inflation linked ladder cannot be built with funds here.

Why use funds, you can just use a ladder of index linked gilts. That's easy enough to do if the duration is known, for instance if someone retires early and wants to cover the income gap between retirement and when the state pension/DB pensions kick in. 

However, because, unlike an annuity, a bond ladder (or two fund equivalent) does not include mortality credits, the payout rate will virtually always be below that of a single life annuity, but will be closer to that for joint life with 100% survivor benefits. The relatively low payout rate is also not helped by the requirement to build the ladder to the extreme end of longevity (e.g., to age 100). On the other hand, the capital (until spent) is available for legacy in the event of early death.

Well exactly. When you start comparing other investments with annuities you'll start looking at "worst case scenarios", what if you live a really long time, what if investments don't do well etc, then when you look at what the "safe" withdrawal rate is, you might find it's a lot less than an annuity would pay. These days you can get 3.8% index linked annuity at 60 or 4.6% at 65, how does that compare with "safe withdrawal rates"?

And even so called "safe withdrawal rates" seem to be based on the premise that the past will repeat itself, which period of the past is unknown but the future must be a repeat of some period in the past, therefore if we use the worst period in the past then we'll be "safe"! Who says the future will be anything like the past? Or that in 100 years time, when they look back, the "worst" period won't be eg 2023-2053. (Not that I believe this will happen, I have equity/bond investments, just that it's possible)

Reasonable estimates of lifespan would involve constructing the ladder out to 100 (currently an estimated 3%-5% chance of exceeding for a single 65yo) or 105 (less than 1% chance of exceeding) depending on how conservative you want to be. That would provide an almost guaranteed income for life (close enough to an annuity but not quite at the less than 1% chance - absent a significant increase in life expectancies). If the OP meant a fixed term annuity for 10 or 20 years (and it is not clear to me), then, in that case, the duration is known.

I've just had a go at costing a gilts ladder, based on investing in index linked gilts at today's clean buy prices (only the new style 3-month lag ones). I thought perhaps with the recent plummet in gilt prices (5%+ over the last week on longer dated ones) it may actually be cheaper. But results in terms of annual real income/total investment is, if I've done it right:

To last 20 years 5.40%

To last 25 years 4.46%

To last 30 years 3.83%

To last 35 years: 3.37%

To last 40 years: 3.01%

On HL annuity page https://www.hl.co.uk/retirement/annuities/best-buy-rates RPI single life annuity rates:

75 year old 6.88%

70 year old 5.63%

65 year old 4.57%

60 year old 3.84%

55 year old 3.34%

So it looks like single life RPI annuities pay about the same as a gilts ladder which lasts till age 90. 

OldScientist

zagfles said:

OldScientist said:

zagfles said:

OldScientist said:

zagfles said:

There are no funds that can do the same job as an annuity. Anyone who tells you there is doesn't know what they're talking about and should be ignored.

With the exception of duration matching with bond funds - e.g. see  https://occaminvesting.co.uk/duration-matching-in-practice for some details (from a UK perspective too!) or https://www.bogleheads.org/forum/viewtopic.php?t=240325 for a US perspective (where an absence of inflation linked annuities means they have to use a DIY approach).

There is no exception. You can't use "duration matching" or a gilts ladder etc if you don't know the duration required. So unless you know when you die, then it's not doing the same "job" as an annuity.

You can make reasonable assumptions about your lifespan, you can make reasonable assumptions about investment returns, interest rates etc, and other investments obviously have potential advantages over an annuity eg likelyhood of better returns, leaving an inheritance etc. But none will do the same job, ie a guaranteed income for the rest of your life.

AFAIK, there are no short duration inflation linked bond funds currently available in the UK, so an inflation linked ladder cannot be built with funds here.

Why use funds, you can just use a ladder of index linked gilts. That's easy enough to do if the duration is known, for instance if someone retires early and wants to cover the income gap between retirement and when the state pension/DB pensions kick in. 

However, because, unlike an annuity, a bond ladder (or two fund equivalent) does not include mortality credits, the payout rate will virtually always be below that of a single life annuity, but will be closer to that for joint life with 100% survivor benefits. The relatively low payout rate is also not helped by the requirement to build the ladder to the extreme end of longevity (e.g., to age 100). On the other hand, the capital (until spent) is available for legacy in the event of early death.

Well exactly. When you start comparing other investments with annuities you'll start looking at "worst case scenarios", what if you live a really long time, what if investments don't do well etc, then when you look at what the "safe" withdrawal rate is, you might find it's a lot less than an annuity would pay. These days you can get 3.8% index linked annuity at 60 or 4.6% at 65, how does that compare with "safe withdrawal rates"?

And even so called "safe withdrawal rates" seem to be based on the premise that the past will repeat itself, which period of the past is unknown but the future must be a repeat of some period in the past, therefore if we use the worst period in the past then we'll be "safe"! Who says the future will be anything like the past? Or that in 100 years time, when they look back, the "worst" period won't be eg 2023-2053. (Not that I believe this will happen, I have equity/bond investments, just that it's possible)

Reasonable estimates of lifespan would involve constructing the ladder out to 100 (currently an estimated 3%-5% chance of exceeding for a single 65yo) or 105 (less than 1% chance of exceeding) depending on how conservative you want to be. That would provide an almost guaranteed income for life (close enough to an annuity but not quite at the less than 1% chance - absent a significant increase in life expectancies). If the OP meant a fixed term annuity for 10 or 20 years (and it is not clear to me), then, in that case, the duration is known.

I've just had a go at costing a gilts ladder, based on investing in index linked gilts at today's clean buy prices (only the new style 3-month lag ones). I thought perhaps with the recent plummet in gilt prices (5%+ over the last week on longer dated ones) it may actually be cheaper. But results in terms of annual real income/total investment is, if I've done it right:

To last 20 years 5.40%

To last 25 years 4.46%

To last 30 years 3.83%

To last 35 years: 3.37%

To last 40 years: 3.01%

On HL annuity page https://www.hl.co.uk/retirement/annuities/best-buy-rates RPI single life annuity rates:

75 year old 6.88%

70 year old 5.63%

65 year old 4.57%

60 year old 3.84%

55 year old 3.34%

So it looks like single life RPI annuities pay about the same as a gilts ladder which lasts till age 90. 

I get similar answers for the ladder using pmt(1%,20,-100,0,1) - so we're either both wrong or both right!

Unfortunately, payout rates for Joint RPI annuities (with 100% survivor benefits) are not available on the HL site, but can be found using the moneyhelper tool. 

For a 65 year old couple in good health with 100% survivor benefits and no guarantee, the rate for an RPI protected annuity today is 3.6%, while adding a 30 year guarantee (to allow legacy payments to the estate in the event of both annuitant and beneficiary dying) is 3.3%*. The latter is comparable with the rate you calculated for the 35 year ladder (although that comes with a 10% longevity risk) and better than the 40 year ladder (for which the longevity risk is very small).

I would conclude from this: That it is possible to use two funds to mimic a bond ladder which in turn approximates the payments from an annuity, but, assuming longevity risk in the ladder is chosen sensibly, the payout rate and legacy will be less than that available from the lifetime annuity (provided a long guarantee period is selected). For those with an absolute aversion to handing their cash to an insurance company (and there are plenty - as a google of the annuity puzzle indicates) it is an alternative, but a worse one+.

* Value protection leaves the rate unchanged to two decimal places, but of course, the premium (less payments) even with an RPI annuity is (if I understand correctly) received in nominal terms, so might not be worth that much if death occurs 10-20 years after the annuity was taken out.

+ A hybrid scheme where a ladder is constructed for, say, 20 years and a deferred annuity (these are rumoured to exist in the UK, but I've yet to find any concrete evidence) with no death benefits is bought as longevity insurance (e.g., see Zwecher, Retirement Portfolios) is a viable alternative - but that is rather OT.