Annuity rates on the up, is now a time to buy one?

peterg1965

RogerPensionGuy said:

peterg1965 said:

Its unfortunate timing for me, as I am 3 years away form being in a position to stop work and start taking the DC element of my pension income.  With a likely £500,000 sum available (in 3 years when i will be 61), a fixed rate annuity with 50% spousal income and a 10 year guarantee is coming in at about £32,000, this would be compelling.

The alternative, which has been my intent all along, was to do a staged drawdown at £36k for 2 years, reducing to £30k for 3 years, then £24k for the following 14 years (until 80) then £10k a year from then on.  Staging as SP starts (myself and wife) and mortgage paid off.

The prospect of a zero risk £32000/year annuity would trump that drawdown plan in my eyes.

Lets see what the annuity landscape in like at the end of 2026!

You say three years away. 

If you really liked annuity rates at anytime like now, could you not buy an annuity at that point in time?

I'm always amazed when stopping paid employment and activation of pension vehicles appears to be hard linked in a spot time, I've never considered this the case, I am and was always happy to overlap them or a gap in between these matter.

I'm imagine if and when annuity rates jump up another 1% or 2% maybe lots of people will buy annuities before they thought they would.

It's a good point.  However, i am quite a high earner, already have a DB pension in payment and am over the threshold of the additional rate (45% Income tax) so taking another source of income form an annuity whilst still working would see 45% of it disappear in tax straight away.  I cant stomach that!

RogerPensionGuy

peterg1965 said:

RogerPensionGuy said:

peterg1965 said:

Its unfortunate timing for me, as I am 3 years away form being in a position to stop work and start taking the DC element of my pension income.  With a likely £500,000 sum available (in 3 years when i will be 61), a fixed rate annuity with 50% spousal income and a 10 year guarantee is coming in at about £32,000, this would be compelling.

The alternative, which has been my intent all along, was to do a staged drawdown at £36k for 2 years, reducing to £30k for 3 years, then £24k for the following 14 years (until 80) then £10k a year from then on.  Staging as SP starts (myself and wife) and mortgage paid off.

The prospect of a zero risk £32000/year annuity would trump that drawdown plan in my eyes.

Lets see what the annuity landscape in like at the end of 2026!

You say three years away. 

If you really liked annuity rates at anytime like now, could you not buy an annuity at that point in time?

I'm always amazed when stopping paid employment and activation of pension vehicles appears to be hard linked in a spot time, I've never considered this the case, I am and was always happy to overlap them or a gap in between these matter.

I'm imagine if and when annuity rates jump up another 1% or 2% maybe lots of people will buy annuities before they thought they would.

It's a good point.  However, i am quite a high earner, already have a DB pension in payment and am over the threshold of the additional rate (45% Income tax) so taking another source of income form an annuity whilst still working would see 45% of it disappear in tax straight away.  I cant stomach that!

Is it possible to sign up for an annuity rate a person likes today and it only starts paying out at a point in the future.

Example, sign up now and the monthly income just parks itself up inside the plan if you see what I mean, then somehow them 3 years of shelved payments then allow a sensible withdrawal method in a tax efficient way, ie, could annuity flow be plonked in a SIPP?

Or is it possible that a person can lock in to a an annuity today that only starts paying out at a point in the future, like when paid employment stops if you see what I mean. 

Or guess if annuity rates went so attractive this Xmas time, just buy one and absorb paying higher or highest rate Income tax for jisr a few years as in the long-term it generated a better net return for a person. 

Whilst posting here, to anyone, is it possible a person can buy lock in an annuity now that only starts paying out in a year or two as this is probably something that would suit me, any information much appreciated?

OldScientist

Pat38493 said:

OldScientist said:

Mick70 said:

Thumbs_Up said:

Mick70 said:

are there any websites where you can get a quote for an annuity , one that would rise each year with inflation , rather than remain the same for its lifetime.    the way you can get a car insurance quote on moneysupermarket etc 

Try this...

https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/compare-annuities

tried this this site 

Based on a £250k pot, age 56, single annuity, rising rpi, 10 year guarantee and only generated annuity of £8.3k, thought it might have been higher

A payout rate of about 3.3% - not too bad when compared with the historical 44 year (i.e., assuming a planning horizon to 100yo - for a 56 year old, there's an estimated 3.7-6.5% chance of exceeding that age, see https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 ) SWR of 2.4% for a 60/40 (stocks/bonds) portfolio (see https://www.2020financial.co.uk/pension-drawdown-calculator/ ). Although, at 2.7%, this was slightly higher for a 60/20/20 (stocks/bonds/cash) portfolio.

What was the payout SWR over that period for an 80/20 or 100/0 portfolio - I suspect it was significantly higher?

Also it depends how you define not too bad - if you look at the median WR that you could have achieved rather than the minimum, it will be a lot higher, and I would have intuited that annuity providers could get closer to the median considering that they are presumably pooling the risk of everyone into one pot.  I guess guarantees are very expensive and you lost all the upside.

For 44 years, 2.7% for 80/20 and 2.8% for 100/0 (I'm not sure I'd want to hold 100% stocks in retirement though).

You're quite right, the median WR for 60/40 portfolio over 44 years was 4.2%, so better than the annuity rate - but, by definition, failed to support income to 44 years in 50% of historical cases and first failed 18 years after retirement). The annuity providers generally invest in bonds because they have to be in a position to meet their liabilities, although the bonds will include government, commercial, and holdings with low liquidity (e.g. infrastructure) since they can be held for a long time.

Like so many things, it is a case of using the right tool for the right job. RPI Annuities are great at providing a lifetime floor to income (i.e., supporting essential expenditure, however that is defined) and poor at providing upside, while a risky portfolio is great at providing upside (when markets are kind), but poor at providing a lifetime floor (unless that is well below the SWR). There may be a place for both in some retirement plans, but not in others.

OldScientist

RogerPensionGuy said:

peterg1965 said:

RogerPensionGuy said:

peterg1965 said:

Its unfortunate timing for me, as I am 3 years away form being in a position to stop work and start taking the DC element of my pension income.  With a likely £500,000 sum available (in 3 years when i will be 61), a fixed rate annuity with 50% spousal income and a 10 year guarantee is coming in at about £32,000, this would be compelling.

The alternative, which has been my intent all along, was to do a staged drawdown at £36k for 2 years, reducing to £30k for 3 years, then £24k for the following 14 years (until 80) then £10k a year from then on.  Staging as SP starts (myself and wife) and mortgage paid off.

The prospect of a zero risk £32000/year annuity would trump that drawdown plan in my eyes.

Lets see what the annuity landscape in like at the end of 2026!

You say three years away. 

If you really liked annuity rates at anytime like now, could you not buy an annuity at that point in time?

I'm always amazed when stopping paid employment and activation of pension vehicles appears to be hard linked in a spot time, I've never considered this the case, I am and was always happy to overlap them or a gap in between these matter.

I'm imagine if and when annuity rates jump up another 1% or 2% maybe lots of people will buy annuities before they thought they would.

It's a good point.  However, i am quite a high earner, already have a DB pension in payment and am over the threshold of the additional rate (45% Income tax) so taking another source of income form an annuity whilst still working would see 45% of it disappear in tax straight away.  I cant stomach that!

Is it possible to sign up for an annuity rate a person likes today and it only starts paying out at a point in the future.

Example, sign up now and the monthly income just parks itself up inside the plan if you see what I mean, then somehow them 3 years of shelved payments then allow a sensible withdrawal method in a tax efficient way, ie, could annuity flow be plonked in a SIPP?

Or is it possible that a person can lock in to a an annuity today that only starts paying out at a point in the future, like when paid employment stops if you see what I mean. 

Or guess if annuity rates went so attractive this Xmas time, just buy one and absorb paying higher or highest rate Income tax for jisr a few years as in the long-term it generated a better net return for a person. 

Whilst posting here, to anyone, is it possible a person can buy lock in an annuity now that only starts paying out in a year or two as this is probably something that would suit me, any information much appreciated?

There is some information on deferred annuities at   https://www.onlinemoneyadvisor.co.uk/pensions/pension-annuities/deferred-annuity/

I've yet to find any information online on the rates available though... perhaps one of our resident IFAs could shed some light.

Pat38493

OldScientist said:

Pat38493 said:

OldScientist said:

Mick70 said:

Thumbs_Up said:

Mick70 said:

are there any websites where you can get a quote for an annuity , one that would rise each year with inflation , rather than remain the same for its lifetime.    the way you can get a car insurance quote on moneysupermarket etc 

Try this...

https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/compare-annuities

tried this this site 

Based on a £250k pot, age 56, single annuity, rising rpi, 10 year guarantee and only generated annuity of £8.3k, thought it might have been higher

A payout rate of about 3.3% - not too bad when compared with the historical 44 year (i.e., assuming a planning horizon to 100yo - for a 56 year old, there's an estimated 3.7-6.5% chance of exceeding that age, see https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 ) SWR of 2.4% for a 60/40 (stocks/bonds) portfolio (see https://www.2020financial.co.uk/pension-drawdown-calculator/ ). Although, at 2.7%, this was slightly higher for a 60/20/20 (stocks/bonds/cash) portfolio.

What was the payout SWR over that period for an 80/20 or 100/0 portfolio - I suspect it was significantly higher?

Also it depends how you define not too bad - if you look at the median WR that you could have achieved rather than the minimum, it will be a lot higher, and I would have intuited that annuity providers could get closer to the median considering that they are presumably pooling the risk of everyone into one pot.  I guess guarantees are very expensive and you lost all the upside.

For 44 years, 2.7% for 80/20 and 2.8% for 100/0 (I'm not sure I'd want to hold 100% stocks in retirement though).

You're quite right, the median WR for 60/40 portfolio over 44 years was 4.2%, so better than the annuity rate - but, by definition, failed to support income to 44 years in 50% of historical cases and first failed 18 years after retirement). The annuity providers generally invest in bonds because they have to be in a position to meet their liabilities, although the bonds will include government, commercial, and holdings with low liquidity (e.g. infrastructure) since they can be held for a long time.

Like so many things, it is a case of using the right tool for the right job. RPI Annuities are great at providing a lifetime floor to income (i.e., supporting essential expenditure, however that is defined) and poor at providing upside, while a risky portfolio is great at providing upside (when markets are kind), but poor at providing a lifetime floor (unless that is well below the SWR). There may be a place for both in some retirement plans, but not in others.

Are all your calculations based on investing in only UK equities?  The number you quote are always significantly less than numbers I see on cash flow planning software like Timeline, but typically I would be using international investments and not only UK ones.  They are also a lot less than what you could find in the ERN early retirement now blogs and analysis but again that is mainly based on US data.  

OldScientist

Pat38493 said:

OldScientist said:

Pat38493 said:

OldScientist said:

Mick70 said:

Thumbs_Up said:

Mick70 said:

are there any websites where you can get a quote for an annuity , one that would rise each year with inflation , rather than remain the same for its lifetime.    the way you can get a car insurance quote on moneysupermarket etc 

Try this...

https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/compare-annuities

tried this this site 

Based on a £250k pot, age 56, single annuity, rising rpi, 10 year guarantee and only generated annuity of £8.3k, thought it might have been higher

A payout rate of about 3.3% - not too bad when compared with the historical 44 year (i.e., assuming a planning horizon to 100yo - for a 56 year old, there's an estimated 3.7-6.5% chance of exceeding that age, see https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 ) SWR of 2.4% for a 60/40 (stocks/bonds) portfolio (see https://www.2020financial.co.uk/pension-drawdown-calculator/ ). Although, at 2.7%, this was slightly higher for a 60/20/20 (stocks/bonds/cash) portfolio.

What was the payout SWR over that period for an 80/20 or 100/0 portfolio - I suspect it was significantly higher?

Also it depends how you define not too bad - if you look at the median WR that you could have achieved rather than the minimum, it will be a lot higher, and I would have intuited that annuity providers could get closer to the median considering that they are presumably pooling the risk of everyone into one pot.  I guess guarantees are very expensive and you lost all the upside.

For 44 years, 2.7% for 80/20 and 2.8% for 100/0 (I'm not sure I'd want to hold 100% stocks in retirement though).

You're quite right, the median WR for 60/40 portfolio over 44 years was 4.2%, so better than the annuity rate - but, by definition, failed to support income to 44 years in 50% of historical cases and first failed 18 years after retirement). The annuity providers generally invest in bonds because they have to be in a position to meet their liabilities, although the bonds will include government, commercial, and holdings with low liquidity (e.g. infrastructure) since they can be held for a long time.

Like so many things, it is a case of using the right tool for the right job. RPI Annuities are great at providing a lifetime floor to income (i.e., supporting essential expenditure, however that is defined) and poor at providing upside, while a risky portfolio is great at providing upside (when markets are kind), but poor at providing a lifetime floor (unless that is well below the SWR). There may be a place for both in some retirement plans, but not in others.

Are all your calculations based on investing in only UK equities?  The number you quote are always significantly less than numbers I see on cash flow planning software like Timeline, but typically I would be using international investments and not only UK ones.  They are also a lot less than what you could find in the ERN early retirement now blogs and analysis but again that is mainly based on US data.  

The software at https://www.2020financial.co.uk/pension-drawdown-calculator/ is based on UK only data. The model I have programmed myself (using data from macrohistory.net) can use a variety of countries and, for the UK, a mix of different assets (but not, yet, a market weighted global portfolio). Given the different dataset, my results are consistent with those presented by Estrada and Pfau for UK and other countries (e.g. see https://www.advisorperspectives.com/articles/2014/03/04/does-international-diversification-improve-safe-withdrawal-rates ). In that latter link, using a global portfolio added about 20 basis points to the SWR compared to using UK only.

There can also be differences in the calculated SWR as a result of
1) using different bond maturities or types (i.e. government or AAA commercial). The UK bond data in the calculator linked above and what I use is for 15-20 year, I'm not sure what is used in the Dimson, Marsh and Staunton data set (used by timeline, Pfau, and Estrada). Even then the results only approximate a bond fund.
2) different inflation values (e.g. there are at least 4 well regarded inflation datasets for the UK prior to 1948 when RPI was adopted - see https://forums.moneysavingexpert.com/discussion/6321661/historical-inflation-how-different-inflation-models-can-affect-safe-withdrawal-rates/p1 ), or
3) by using monthly data instead of annual (I don't have monthly data for the UK, but do for the US - monthly data reduces the SWR by 20-70 basis points depending on the asset allocation.
4) Different countries. As you say, much of the published/online (including ERN) work is US based - they not only had better stock market returns over much of the 20th and early 21st centuries, but their inflation has also tended to be less.

In other words, even establishing the historical SWR leaves us with perhaps 50 basis points of uncertainty, while future values of SWR are unknown. 

Unfortunately, Timeline no longer appears to be available to those without an FCA number. If you would not contravene any licensing agreement can you post some examples here (e.g. the 44 year case we have been discussing)?

Pat38493

OldScientist said:

Pat38493 said:

OldScientist said:

Pat38493 said:

OldScientist said:

Mick70 said:

Thumbs_Up said:

Mick70 said:

are there any websites where you can get a quote for an annuity , one that would rise each year with inflation , rather than remain the same for its lifetime.    the way you can get a car insurance quote on moneysupermarket etc 

Try this...

https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/compare-annuities

tried this this site 

Based on a £250k pot, age 56, single annuity, rising rpi, 10 year guarantee and only generated annuity of £8.3k, thought it might have been higher

A payout rate of about 3.3% - not too bad when compared with the historical 44 year (i.e., assuming a planning horizon to 100yo - for a 56 year old, there's an estimated 3.7-6.5% chance of exceeding that age, see https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07 ) SWR of 2.4% for a 60/40 (stocks/bonds) portfolio (see https://www.2020financial.co.uk/pension-drawdown-calculator/ ). Although, at 2.7%, this was slightly higher for a 60/20/20 (stocks/bonds/cash) portfolio.

What was the payout SWR over that period for an 80/20 or 100/0 portfolio - I suspect it was significantly higher?

Also it depends how you define not too bad - if you look at the median WR that you could have achieved rather than the minimum, it will be a lot higher, and I would have intuited that annuity providers could get closer to the median considering that they are presumably pooling the risk of everyone into one pot.  I guess guarantees are very expensive and you lost all the upside.

For 44 years, 2.7% for 80/20 and 2.8% for 100/0 (I'm not sure I'd want to hold 100% stocks in retirement though).

You're quite right, the median WR for 60/40 portfolio over 44 years was 4.2%, so better than the annuity rate - but, by definition, failed to support income to 44 years in 50% of historical cases and first failed 18 years after retirement). The annuity providers generally invest in bonds because they have to be in a position to meet their liabilities, although the bonds will include government, commercial, and holdings with low liquidity (e.g. infrastructure) since they can be held for a long time.

Like so many things, it is a case of using the right tool for the right job. RPI Annuities are great at providing a lifetime floor to income (i.e., supporting essential expenditure, however that is defined) and poor at providing upside, while a risky portfolio is great at providing upside (when markets are kind), but poor at providing a lifetime floor (unless that is well below the SWR). There may be a place for both in some retirement plans, but not in others.

Are all your calculations based on investing in only UK equities?  The number you quote are always significantly less than numbers I see on cash flow planning software like Timeline, but typically I would be using international investments and not only UK ones.  They are also a lot less than what you could find in the ERN early retirement now blogs and analysis but again that is mainly based on US data.  

The software at https://www.2020financial.co.uk/pension-drawdown-calculator/ is based on UK only data. The model I have programmed myself (using data from macrohistory.net) can use a variety of countries and, for the UK, a mix of different assets (but not, yet, a market weighted global portfolio). Given the different dataset, my results are consistent with those presented by Estrada and Pfau for UK and other countries (e.g. see https://www.advisorperspectives.com/articles/2014/03/04/does-international-diversification-improve-safe-withdrawal-rates ). In that latter link, using a global portfolio added about 20 basis points to the SWR compared to using UK only.

There can also be differences in the calculated SWR as a result of
1) using different bond maturities or types (i.e. government or AAA commercial). The UK bond data in the calculator linked above and what I use is for 15-20 year, I'm not sure what is used in the Dimson, Marsh and Staunton data set (used by timeline, Pfau, and Estrada). Even then the results only approximate a bond fund.
2) different inflation values (e.g. there are at least 4 well regarded inflation datasets for the UK prior to 1948 when RPI was adopted - see https://forums.moneysavingexpert.com/discussion/6321661/historical-inflation-how-different-inflation-models-can-affect-safe-withdrawal-rates/p1 ), or
3) by using monthly data instead of annual (I don't have monthly data for the UK, but do for the US - monthly data reduces the SWR by 20-70 basis points depending on the asset allocation.
4) Different countries. As you say, much of the published/online (including ERN) work is US based - they not only had better stock market returns over much of the 20th and early 21st centuries, but their inflation has also tended to be less.

In other words, even establishing the historical SWR leaves us with perhaps 50 basis points of uncertainty, while future values of SWR are unknown. 

Unfortunately, Timeline no longer appears to be available to those without an FCA number. If you would not contravene any licensing agreement can you post some examples here (e.g. the 44 year case we have been discussing)?

Simplified Timeline scenario of £1m portfolio invested in their default example of an 80/20 equity fund (can post screenshot of current proposal).

Retirement age 54 starting this year.

Charges 0.5%

Future contributions none

Switched spending to gross (Timeline normally works in net spend and calculates income taxes).

Longevity - 98yo which corresponds to the default used by Timeline survival probability 10% or less.

4% Withdrawal rate - lasts till 90yo.  Failures were January 1915, and 1969 which only failed at 97.5yo

3.5% withdrawal rate - 100% success, worst case legacy £730k

Minimum net sustainable spend £32700 (I believe this report shows net after taxes regardless of your settings on the spending plan)

Early 1970s and 1929 all shown as surviving (1973 portfolio was halved in first 3 years but then recovered )

Reducing the equities portion increases the failure rate maginally.  Reducing equities below 50%, failure rate goes off a cliff - 30/70 gives only 58% chance of success.

This is why I am wondering about it because what Timeline claims it supportable seems like significantly more than what you are calculating in your data.  No idea if Timeline is too optimistic or yours are too pessimistic or something in betweeen.

Pat38493

This is the asset mix used for the 80/20 - there is possibly some min/maxing of stats based on past history that will obviously not give the same results going forward?

westv

It is slightly amusing that a thread about annuities has developed into a thread about drawdown rates.

OldScientist

westv said:

It is slightly amusing that a thread about annuities has developed into a thread about drawdown rates.

But relevant if decisions to purchase, or not purchase, are determined by comparing annuity payout rates with potential drawdown rates!