Annuity Purchase Cost

Hoenir

Bostonerimus1 said:

OldScientist said:

Qyburn said:

OldScientist said:

The annuity puzzle (i.e., why, when there is a choice, relatively few annuities are purchased) has been puzzled over for  getting on for at least 40 years without (AFAIK) a clear unambiguous explanation being found. 

Not sure what would have been puzzled over 40 years ago, when private pensions didn't even exist, and over 30 years before there was any choice.

There are other countries apart from the UK - much of the early work was done in the US. Anyway, insurance based annuities have been available for sale in the UK for a very long time (1762 or thereabouts) but sales were boosted in 1956 when tax breaks for the self employed in approved schemes were made available (essentially so the self employed were treated the same as those with occupational pensions) and the run down of capital for purchased life annuities (i.e., voluntary) also became tax exempt.

The drop in annuity take up must also have been due to the rise of retail mutual funds and tax wrappers like 401ks, and IRAs in the US and eventually SIPPs and ISAs in the UK. It also correlated with the drop in the DB pension which is obviously very similar to a commercial annuity.

40 years of falling interest rates (and the low inflation era created by globalisation)  have changed people's perceptions of how to plan for their retirement. The last person who remembers has left the building syndrome. 

Bostonerimus1

If anyone is interested about lifetime annuities, bonds and retirement income generation from an investment portfolio here is a great article by Micheal Kitces that has links to some more academic papers on the subject. As always remember that this is from an American perspective, but the general principles still apply.

https://www.kitces.com/blog/understanding-the-true-impact-of-single-premium-immediate-annuities-on-retirement-income-sustainability/

OldScientist

michaels said:

OldScientist said:

The annuity puzzle (i.e., why, when there is a choice, relatively few annuities are purchased) has been puzzled over for  getting on for at least 40 years without (AFAIK) a clear unambiguous explanation being found. In the UK, there was a significant drop in annuity purchases after the so-called pension freedoms (e.g., see https://committees.parliament.uk/publications/8514/documents/86189/default/ ) but this also coincided with record low yields in gilts - it will be interesting to see whether this has increased again as yields (and annuity rates) have increased over the last 18 months or so. Anecdotal evidence from MSE suggests that there has been more interest and discussion over that period.

Could the answer to the 'annuity puzzle' relate to the amount of income IFAs and the investment industry won't earn if a DC pot holder buys an annuity on fixed commission?!

A lot of answers have been suggested over the years, a nice summary can be found at https://www.aeaweb.org/articles?id=10.1257/jep.25.4.143

who conclude "The tiny market share of individual annuities should not be viewed as an indicator of underlying preferences but rather as a consequence of institutional factors about the availability and framing of annuity options."

which may very well overlap with your suggestion!

OldScientist

Hoenir said:

Bostonerimus1 said:

OldScientist said:

Qyburn said:

OldScientist said:

The annuity puzzle (i.e., why, when there is a choice, relatively few annuities are purchased) has been puzzled over for  getting on for at least 40 years without (AFAIK) a clear unambiguous explanation being found. 

Not sure what would have been puzzled over 40 years ago, when private pensions didn't even exist, and over 30 years before there was any choice.

There are other countries apart from the UK - much of the early work was done in the US. Anyway, insurance based annuities have been available for sale in the UK for a very long time (1762 or thereabouts) but sales were boosted in 1956 when tax breaks for the self employed in approved schemes were made available (essentially so the self employed were treated the same as those with occupational pensions) and the run down of capital for purchased life annuities (i.e., voluntary) also became tax exempt.

The drop in annuity take up must also have been due to the rise of retail mutual funds and tax wrappers like 401ks, and IRAs in the US and eventually SIPPs and ISAs in the UK. It also correlated with the drop in the DB pension which is obviously very similar to a commercial annuity.

40 years of falling interest rates (and the low inflation era created by globalisation)  have changed people's perceptions of how to plan for their retirement. The last person who remembers has left the building syndrome. 

You're not wrong - couple this with, generally increasing life expectancies (which will, of course, also affect drawdown plans) and annuity rates have fallen dramatically. For example, Cannon and Tonks (see https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=bef182eca284b12c1cfe0ae5e9a12da4eec34fb3 ) show (page 49) that annuity rates for a single life level annuity taken by a 65 year old male fell from 17% (!) in 1979 to about 8% by 2002. From 1957 to 1979 (page 50), the rate never fell below 10% even with low interest rates. From the HL best buy page, they have now reached 7% (of course, unisex only now).

westv

OldScientist said:

Hoenir said:

Bostonerimus1 said:

OldScientist said:

Qyburn said:

OldScientist said:

The annuity puzzle (i.e., why, when there is a choice, relatively few annuities are purchased) has been puzzled over for  getting on for at least 40 years without (AFAIK) a clear unambiguous explanation being found. 

Not sure what would have been puzzled over 40 years ago, when private pensions didn't even exist, and over 30 years before there was any choice.

There are other countries apart from the UK - much of the early work was done in the US. Anyway, insurance based annuities have been available for sale in the UK for a very long time (1762 or thereabouts) but sales were boosted in 1956 when tax breaks for the self employed in approved schemes were made available (essentially so the self employed were treated the same as those with occupational pensions) and the run down of capital for purchased life annuities (i.e., voluntary) also became tax exempt.

The drop in annuity take up must also have been due to the rise of retail mutual funds and tax wrappers like 401ks, and IRAs in the US and eventually SIPPs and ISAs in the UK. It also correlated with the drop in the DB pension which is obviously very similar to a commercial annuity.

40 years of falling interest rates (and the low inflation era created by globalisation)  have changed people's perceptions of how to plan for their retirement. The last person who remembers has left the building syndrome. 

You're not wrong - couple this with, generally increasing life expectancies (which will, of course, also affect drawdown plans) and annuity rates have fallen dramatically. For example, Cannon and Tonks (see https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=bef182eca284b12c1cfe0ae5e9a12da4eec34fb3 ) show (page 49) that annuity rates for a single life level annuity taken by a 65 year old male fell from 17% (!) in 1979 to about 8% by 2002. From 1957 to 1979 (page 50), the rate never fell below 10% even with low interest rates. From the HL best buy page, they have now reached 7% (of course, unisex only now).

I would rather have lower rates and a longer life though. 

Bostonerimus1

westv said:

OldScientist said:

Hoenir said:

Bostonerimus1 said:

OldScientist said:

Qyburn said:

OldScientist said:

The annuity puzzle (i.e., why, when there is a choice, relatively few annuities are purchased) has been puzzled over for  getting on for at least 40 years without (AFAIK) a clear unambiguous explanation being found. 

Not sure what would have been puzzled over 40 years ago, when private pensions didn't even exist, and over 30 years before there was any choice.

There are other countries apart from the UK - much of the early work was done in the US. Anyway, insurance based annuities have been available for sale in the UK for a very long time (1762 or thereabouts) but sales were boosted in 1956 when tax breaks for the self employed in approved schemes were made available (essentially so the self employed were treated the same as those with occupational pensions) and the run down of capital for purchased life annuities (i.e., voluntary) also became tax exempt.

The drop in annuity take up must also have been due to the rise of retail mutual funds and tax wrappers like 401ks, and IRAs in the US and eventually SIPPs and ISAs in the UK. It also correlated with the drop in the DB pension which is obviously very similar to a commercial annuity.

40 years of falling interest rates (and the low inflation era created by globalisation)  have changed people's perceptions of how to plan for their retirement. The last person who remembers has left the building syndrome. 

You're not wrong - couple this with, generally increasing life expectancies (which will, of course, also affect drawdown plans) and annuity rates have fallen dramatically. For example, Cannon and Tonks (see https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=bef182eca284b12c1cfe0ae5e9a12da4eec34fb3 ) show (page 49) that annuity rates for a single life level annuity taken by a 65 year old male fell from 17% (!) in 1979 to about 8% by 2002. From 1957 to 1979 (page 50), the rate never fell below 10% even with low interest rates. From the HL best buy page, they have now reached 7% (of course, unisex only now).

I would rather have lower rates and a longer life though. 

I don't think this is relevant to most people who buy an annuity for the lifetime, no hassle income and longevity insurance, but the IRR of an annuity without RPI will never exceed the payout rate. The longer you live the closer it trends towards the payout rate though. If you have RPI then the eventual IRR can exceed the initial payout rate.

FIREDreamer

Bostonerimus1 said:

westv said:

OldScientist said:

Hoenir said:

Bostonerimus1 said:

OldScientist said:

Qyburn said:

OldScientist said:

The annuity puzzle (i.e., why, when there is a choice, relatively few annuities are purchased) has been puzzled over for  getting on for at least 40 years without (AFAIK) a clear unambiguous explanation being found. 

Not sure what would have been puzzled over 40 years ago, when private pensions didn't even exist, and over 30 years before there was any choice.

There are other countries apart from the UK - much of the early work was done in the US. Anyway, insurance based annuities have been available for sale in the UK for a very long time (1762 or thereabouts) but sales were boosted in 1956 when tax breaks for the self employed in approved schemes were made available (essentially so the self employed were treated the same as those with occupational pensions) and the run down of capital for purchased life annuities (i.e., voluntary) also became tax exempt.

The drop in annuity take up must also have been due to the rise of retail mutual funds and tax wrappers like 401ks, and IRAs in the US and eventually SIPPs and ISAs in the UK. It also correlated with the drop in the DB pension which is obviously very similar to a commercial annuity.

40 years of falling interest rates (and the low inflation era created by globalisation)  have changed people's perceptions of how to plan for their retirement. The last person who remembers has left the building syndrome. 

You're not wrong - couple this with, generally increasing life expectancies (which will, of course, also affect drawdown plans) and annuity rates have fallen dramatically. For example, Cannon and Tonks (see https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=bef182eca284b12c1cfe0ae5e9a12da4eec34fb3 ) show (page 49) that annuity rates for a single life level annuity taken by a 65 year old male fell from 17% (!) in 1979 to about 8% by 2002. From 1957 to 1979 (page 50), the rate never fell below 10% even with low interest rates. From the HL best buy page, they have now reached 7% (of course, unisex only now).

I would rather have lower rates and a longer life though. 

I don't think this is relevant to most people who buy an annuity for the lifetime, no hassle income and longevity insurance, but the IRR of an annuity without RPI will never exceed the payout rate. The longer you live the closer it trends towards the payout rate though. If you have RPI then the eventual IRR can exceed the initial payout rate.

I went for the RPI option to guard against future inflation. It isn’t clear what happens post 2030 when RPI ceases to exist.

Malthusian

FIREDreamer said:

I went for the RPI option to guard against future inflation. It isn’t clear what happens post 2030 when RPI ceases to exist.

It will be uplifted in line with what is currently called CPIH.

Unless your terms say different, but I'd be surprised.

FIREDreamer

Malthusian said:

FIREDreamer said:

I went for the RPI option to guard against future inflation. It isn’t clear what happens post 2030 when RPI ceases to exist.

It will be uplifted in line with what is currently called CPIH.

Unless your terms say different, but I'd be surprised.

No mention of anything in my documentation. CPIH seems a bit rubbish compared to RPI (based on recent values anyway).

Bostonerimus1

FIREDreamer said:

Malthusian said:

FIREDreamer said:

I went for the RPI option to guard against future inflation. It isn’t clear what happens post 2030 when RPI ceases to exist.

It will be uplifted in line with what is currently called CPIH.

Unless your terms say different, but I'd be surprised.

No mention of anything in my documentation. CPIH seems a bit rubbish compared to RPI (based on recent values anyway).

Changing from RPI to the usually lower CPIH rate ( maybe 1% less) would be a big change in the annuity terms. There must be something in the contract and there should be some consideration in the annuity terms - although I'm cynical enough tho think that insurers will have language in the fine print that is beneficial to their bottomline.

I've decided to buy the annuity my insurer in the US has quoted as the 2% loyalty bonus and today's higher than recent rates make it a great deal for guaranteed income...as long as I live long enough.