Annuity choices

Hoenir

Moonwolf said:

dunstonh said:

You don't know if your period is going to be like 1993-2021 with very low inflation or have years like 1975 when inflation got to 24.21% (nearly the equivalent of 10 years worth in a single year)

Plus, presumably you are trading one risk for another.  Keeping in drawdown to hedge against inflation would look like the wrong choice if inflation fell and stayed low but then a market crash seriously reduced your pension fund.

Purely said as an observation. The period cited by @dunstonh. Coincides with the emergence of China as a manufacturing powerhouse along with all the deflationary influences it created. Protectionism and onshoring are likely to create a very different environment. 

westv

sgx2000 said:

Simple spreadsheet
At 7% inflation, the real world value of your pound approx. halves in 10 years

And the total received from an RPI annuity will exceed the level annuity in year 17.

MarkCarnage

You can take a view on your own life expectancy, future inflation or a combination of the two in annuities. However, it is essentially a form of income insurance and the insurer is taking an aggregate view of mortality. They don't take a view on future inflation, which would be pretty reckless if they were writing a book of annuities with contractual RPI/CPI inflation increases. Their regulator wouldn't let them. 
Instead they will hedge that risk using index linked gilts (or more probably swaps in practice) with a portfolio of investment grade credit to help with the annuity cashflows and possibly some other exposures to contractual income flows. 
When a large pension fund goes to an insurer for a buy out/buy in, their preferred receiving asset mix will be some variation of the above, and anything more exotic will get sold beforehand or priced accordingly in the deal. 

QrizB

Moonwolf said:

( I also have "Do I take an actuarial reduction and reduce my early drawdown requirements or drawdown a big chunk of my fund bridging to my DB pensions and have a larger guaranteed income later?" )

I get better outcomes (fewer failures / higher fund minima / higher average protfolios at death) in cFIREsim when drawing my 5% capped DB pension early, rather than using more DC to bridge from ERA to NRA.

Your situation might be different, but you might like to try the models and see.

JohnWinder

Thanks for helping me muddle my way through inflation protection. I can now see that annuity providers don’t need to anticipate the actual future inflation, as they simply need to hold linkers to cover the required time period such that the linkers will keep up with inflation whatever it is. In effect, rather than the annuitant buying a bond ladder themselves the annuity provider buys/holds and pays out regularly from a similar bond ladder (only a much better one with no lumpiness of payments). If real yields are high when the annuity is bought (and thus the bond ladder held by the annuity provider also has high yields) then the annuitant can get more income than if bond yields are low at that time.
Similarly, an annuity provider offering a flat rate annuity has a nominal not inflation linked future obligation to you, thus can reliably meet this with nominal bonds.
It seems to follow, then, that the annuity provider of flat or RPI annuities isn’t favoured or disadvantaged by the RPI; they know their future payment obligations, so they buy the gilts to meet those.

Thus, why are insurers now favoured?

‘An RPI annuity is effectively paying insurance.   At the moment, RPI rates are favouring insurers.’

Johnnyy_Boy

westv said:

sgx2000 said:

Simple spreadsheet
At 7% inflation, the real world value of your pound approx. halves in 10 years

And the total received from an RPI annuity will exceed the level annuity in year 17.

So based on retiring at state pension age of 66, it will be after you are 83 being better off. I would guess you would be spending much less by then. 

Notepad_Phil

Johnnyy_Boy said:

westv said:

sgx2000 said:

Simple spreadsheet
At 7% inflation, the real world value of your pound approx. halves in 10 years

And the total received from an RPI annuity will exceed the level annuity in year 17.

So based on retiring at state pension age of 66, it will be after you are 83 being better off. I would guess you would be spending much less by then. 

Not necessarily, e.g.you might be spending less on such things as holidays, lunches out, etc, but then you might be spending more on gardeners, cleaners, etc. Many people will have such a U shaped curve of expenditure i.e. starts off high, then drops off but then goes up again as you start to need outside help to do the things you used to do for yourself.

Moonwolf

QrizB said:

Moonwolf said:

( I also have "Do I take an actuarial reduction and reduce my early drawdown requirements or drawdown a big chunk of my fund bridging to my DB pensions and have a larger guaranteed income later?" )

I get better outcomes (fewer failures / higher fund minima / higher average protfolios at death) in cFIREsim when drawing my 5% capped DB pension early, rather than using more DC to bridge from ERA to NRA.

Your situation might be different, but you might like to try the models and see.

The modelling I have done is similar, and many scenarios leave me better off as there is more to grow in the early years.  However, my DBs + State come to over £36,000 a year which is very good against my budget.  Taking early reduces one by 24% (the others pay at 60 anyway and the state at 67) and I'll have over £3,500 less a year.  This leaves me more vulnerable in the event of a market crash near the start.  In the end I think I'll end up leaning into the security, knowing I should never have less than £36,000 in real terms*

*Technically one DB is capped at 5% and who knows what the government will do with state pension in my 70s and 80s

sgx2000

Johnnyy_Boy said:

westv said:

sgx2000 said:

Simple spreadsheet
At 7% inflation, the real world value of your pound approx. halves in 10 years

And the total received from an RPI annuity will exceed the level annuity in year 17.

So based on retiring at state pension age of 66, it will be after you are 83 being better off. I would guess you would be spending much less by then. 

Exactly my thoughts ... And exactly what I am about to do....
Added £26K to my current pension.
HMRC adds tax relief (just arrived)
Then move pension to L&G to start Flat annuity....

Only issue is if we have a sustained period of hyper inflation...
Given that inflation is currently higher than the traditional average
One would hope inflation is more likely to fall slightly, than rise in the near future...

DT2001

sgx2000 said:

Johnnyy_Boy said:

westv said:

sgx2000 said:

Simple spreadsheet
At 7% inflation, the real world value of your pound approx. halves in 10 years

And the total received from an RPI annuity will exceed the level annuity in year 17.

So based on retiring at state pension age of 66, it will be after you are 83 being better off. I would guess you would be spending much less by then. 

Exactly my thoughts ... And exactly what I am about to do....
Added £26K to my current pension.
HMRC adds tax relief (just arrived)
Then move pension to L&G to start Flat annuity....

Only issue is if we have a sustained period of hyper inflation...
Given that inflation is currently higher than the traditional average
One would hope inflation is more likely to fall slightly, than rise in the near future...

In your plan do you have the option of downsizing? As if there was high inflation I would expect house prices to follow that trend so you provide some insurance against the decreasing real value of your annuity.