Have we reached peak annuity rates?

Bostonerimus1

I don't think we are at peak annuity rates. Inflation is increasing and bond markets seem to be reacting to that and current geo-political risks in a more understandable way than equity markets. In the US 30 year T-bills are at 5% and will likely keep rising as the Fed is predicted to raise rates to combat inflation. I think the same story will paly out in the UK, so I see annuity rates increasing too.

mrklaw

I’m not looking for a lifetime annuity but might consider a 9-10 year one for bridge. I agree looking at gilt and treasuries yields over the next 30 years I think these rates may hold for a while yet and certainly for a 10 year with a fixed time horizon. Maybe lifetime ones will soften a little but that depends on what the yield curve looks like. I’m not sure how governments push that down, once markets get a taste for locking in higher borrowing costs.

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/82014347#Comment_82014347

There are similarities - in that either will provide an inflation protected income (assuming an RPI annuity) starting from a date in the future. However, I agree that there are differences between them, e.g.,

1. The ladder will only provide income for the length of the ladder (to 100yo in the example I gave), while the annuity will provide income for life.
2. In the absence of a guarantee (which will reduce the payout), with the annuity there will be no payout in the event of death before the end of the deferral period or after it is in payment, while the ladder would leave a legacy (although not much in the final few years).
3. A single life annuity at 85yo taken immediately (i.e., not deferred) currently pays about 13.5% - so you're right that is a lot better than even a deferred ladder. This is not surprising, since the mortality credits in the annuity are quite valuable at 85yo (roughly halving the length of the 'ladder').
4. A deferred ILG ladder exists in the UK, while, unless things have changed since the last time this was discussed on this forum, a deferred annuity does not.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82015524#Comment_82015524

You're right that a deferred annuity doesn't exist, but you can't really create anything like it. Given that life expectancy at 65 is approx 20 years (that's the mean, not sure of the median but assume it's similar), then you'd expect a deferred annuity bought at 65 for payment from 85 to pay approximately double what an 85 year old would get buying an immediate annuity (since half 65 year olds won't live to 85).

So a 27% index linked annuity rate, which is massively better than 11.3% or 13.5%. So someone in drawdown could plan for 20 years of drawdown plus spend under 4x their annual income requirement to buy a deferred annuity.

I suppose one method might be a reverse life insurance, where it pays out if you don't die by a particular age! Then use the proceeds to buy an annuity. But I doubt that exists either, even in a flat form let alone index linked, and even if it did, can you get it inside a pension…

Annuity providers ought to able to provide this product, they have the necessary tools (index linked gilts, mortality tables etc).

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82016112#Comment_82016112

You could create your own “deferred annuity” with a bond portfolio/fund of appropriate duration that you then use to buy an annuity.

Back in 1990ish in the US I contributed to a deferred annuity type product with an insurance company that provided annual interest that tracked the Fed rates and guaranteed a minimum of 3%. Looking back the average annual return is 5.5%. It has various drawdown options, but one is a lifetime annuity starting at 65 with a payout rate of 10%…they pay a loyalty bonus so the rate is a few % above the market rate. The bonus is nice, but you can achieve something similar with a bond portfolio and that you convert into a lifetime annuity. This is part of the reason to have a diverse portfolio that contains both bonds and equities.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82016168#Comment_82016168

You're not getting it. How does that give you the mortality premium during the deferment period? Could you get 27% index linked? You can't recreate it unless you have the insurance element, the pooling of the mortality (or rather longevity) risk. An individual can't do it, it needs an annuity provider or insurer to pool the longevity risk.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82016266#Comment_82016266

Yes, it's not perfect! You don't get the advantage of pooled risk (hence my " "), but it is a low risk approach to future retirement income. When people push 100% equities because of the way equity markets have grown they forget about risk. People can design portfolios to moderate risk and produce future income. A UK deferred annuity would be a useful tool, but how many people would use it, obviously it's not a product UK insurance companies see as worth providing.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82016316#Comment_82016316

It's not a question of not being "perfect", like all these other ways of supposedly "recreating" a deferred annuity, it completely misses the whole point of them. The point is you make a deal with an annuity provider "here's lots of money, you get to keep the whole lot if I die in the next 20 years! But if I survive, I want a high income for the rest of my life".

Buying an annuity in a SIPP, deferred index linked ladders, bonds of selected durations, equities etc, none will get close to recreating that deal.

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/82016112#Comment_82016112

I agree - mortality credits (i.e., the doubling you mention) are impossible to obtain in DIY solutions.

Yes, I agree that insurance companies have all of the tools to offer them - even if they took a larger fee to cover unexpected improvements in mortality, they might still be attractive to some.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82016389#Comment_82016389

Maybe come up with a solution that has some properties of a deferred annuity as such a product is not available in the UK. It won't be perfect, but good enough has utility.