Tempted by an annuity - comments please

RogerPensionGuy

zagfles said:

Personally I wouldn't even consider a flat annuity. Inflation seems to be the biggest threat to your income, don't live under the illusion your DB pension is "inflation protected", it isn't, even with a 5% cap a decade like the 1970s would more than halve its value, so personally I'd look for something to hedge against that, eg an index linked annuity or buying index linked gilts or maybe a combination, eg a gilt ladder for the early retirement period on top of an IL annuity if you envisage spending more then. 

Using a flat annuity to front load your spend may achieve similar but it's totally random, you don't know what inflation will be over the next 20-30 years, using a flat annuity means your income will drop every year by random unknown amounts. You could win or lose vs index linked, but it's a risk.

We've lived under relatively low inflation over the past few decades so it's easy to dismiss the possibility of high, rampant, or even run away inflation. This isn't some theoretical possibility or one in a million event, it's happening right now in some countries, loads of countries even in Europe have had sky high inflation over the last few decades which has wiped out unprotected cash savings. If you've travelled a lot you'll probably have been to countries where you have to count the zeros on the notes, where 1000 of the currency unit will get you a beer or a meal. Those currencies never started out like that, they usually started with a currency unit similar to the dollar, pound or euro. Now imagine having to pay £1000 for a beer. We're only one numpty govt away from that. How much do you trust politicians?

Nice thread and really like this post above, excuse the drift.

On a general note we need to remember the next few years maybe very unlike the last 10, 15, 20 years of low inflation, low interest rates and stockmarkets just rolling up so much if the time.

I'm trying to have many various streams of cash in retirement and keeping these streams with flexibilities to adjust if required. 

The near future(20yrs) maybe pretty different to the 20 that just passed.

JohnWinder

Decumulation investing has three risks (I can think of, maybe more): market risk; longevity risk, and inflation. An indexed lifetime annuity off-loads all three to someone else, but adds ‘the insurance company fails’ risk. We each have different perspectives on those three risks, and might deal with them differently.

xylophone

 that will consist of two decades of rabid inflation and WW3 

Enough to make anybody feel weak at the knees!

MK62

JohnWinder said:

Decumulation investing has three risks (I can think of, maybe more): market risk; longevity risk, and inflation. An indexed lifetime annuity off-loads all three to someone else, but adds ‘the insurance company fails’ risk. We each have different perspectives on those three risks, and might deal with them differently.

......it also adds legacy risk (ie having a lot less money to pass on after you've gone).......a meaningful consideration for many.

JohnWinder

‘......it also adds legacy risk (ie having a lot less money to pass on after you've gone).......a meaningful consideration for many. ‘

Truly, that money is lost as a legacy, but I don’t think I’d call that a risk as it’s a certainty.
But if it’s not a certainty that there’ll be less legacy, I think your legacy risk is covered by ‘market risk’; recall, ‘risk’ with investing is not just downside value changes but upside as well. Thus, average return, and standard deviation as a measure of risk (and s.d. is +/-).
Making use of market risk, the security of an annuity allows one to invest with more risk and thus more return potential for a legacy. Whether that holds qualitatively I don’t know.

zagfles

JohnWinder said:

Decumulation investing has three risks (I can think of, maybe more): market risk; longevity risk, and inflation. An indexed lifetime annuity off-loads all three to someone else, but adds ‘the insurance company fails’ risk. We each have different perspectives on those three risks, and might deal with them differently.

Annuities are 100% protected by the FSCS with no upper limit, subject to criteria, see https://www.fscs.org.uk/check/pension-protection-checker/ 

The real risk is the govt defaulting on their debt, if that happened FSCS protection would probably be useless...

zagfles

MK62 said:

JohnWinder said:

Decumulation investing has three risks (I can think of, maybe more): market risk; longevity risk, and inflation. An indexed lifetime annuity off-loads all three to someone else, but adds ‘the insurance company fails’ risk. We each have different perspectives on those three risks, and might deal with them differently.

......it also adds legacy risk (ie having a lot less money to pass on after you've gone).......a meaningful consideration for many.

That's not a risk. It's a known consequence.

MK62

Well, strictly speaking, risk is the combination of the probability of something happening and the consequences of it, but I'm not going to argue this......whether it's a risk or a consequence, loss of legacy is a consideration, and for many, a major one.

Steve_666_

Is there any mileage in a strategy that splits your annuity funds into 2 and allocating
50% to an annuity rising by 3%
50% to an annuity rising by the RPI ?

zagfles

Steve_666_ said:

Is there any mileage in a strategy that splits your annuity funds into 2 and allocating
50% to an annuity rising by 3%
50% to an annuity rising by the RPI ?

Why? OP wants front loaded spend, so a fixed rate increasing annuity would likely be pointless. It's still fixed rate relative to nominal not real and so doesn't provide inflation protection.

An index linked gilt ladder with reducing maturity values over the years would likely be better, possibly combined with an index linked annuity. Then OP could have predictable real income skewed as much as he likes towards the early years. 

Or he could get a flat annuity and gamble that inflation will accurately reflect the rate at which he wants to front load his spend.