"New" income product for retirement?

LHW99

dunstonh said:

I agree, and since an IFA could also set up that sort of structure, then I am not (yet) convinced that the advantage of keeping the annuity income within the pension until drawdown would provide a definitely better result than waiting to annuitise until ready to take an income (and hence older / less fit / improved annuity rate)

Reducing life expectancy and health are drivers to increase the annuity rate.    However, rising interest rates are too and we are about to enter a phase of falling interest rates.

That is not the primary gain though.   Its about replacing bonds risk with security of yield and therefore allowing a bit more in equities.  The increase in equities will, over the long term, increase the capital value.   

But this could be the case with an annuity external to the pension drawdown fund. I understand the idea that the annuity income would be tax-free if retained in the pension, but that does seem a bit of "tax-tail wagging" reducing the flexibility.

nce an annuity has been purchased however, it appears that it can be paid to only self, or spouse if that type has been purchased, and it isn't currently possible to reverse the purchase and obtain a lump sum.

No. Annuities do not have to go to spouses only.   The capital value remaining can go to a named beneficiary.   Although if the annuity is still within the pension wrapper, the capital value will become cash in the pension and can be passed on as beneficiary drawdown etc.

That is the normal process for an annuity, and the links from the page mentioned by Bostonerimus1, confirm that you may not get the full purchase price (of this product) returned at death or change of circumstances.

Although if the annuity is still within the pension wrapper, the capital value will become cash in the pension and can be passed on as beneficiary drawdown etc.

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<b>This is what seems odd to me. There were murmurings some time ago about people being able to "reverse" an annuity purchase / sell it back to the company. It didn't happen because the annuity providers felt it would be too difficult / expensive / niche to be viable.</b>
Is there some insurance policy included that ensures that there remains a death benefit of an amount equivalent to (purchase price - income paid to drawdown fund)? If not, it appears that there could be costs in both set-up and unwinding, as well as ongoing charges along the way.I doubt it as standard annuity death benefits should suffice.    There shouldn't be any ongoing charges on the annuity side.

I'm not saying this isn't a solution for some people, but it does sound more complicated (costly?) than keeping the different parts: annuity / equity / other separate.It shouldn't be costly.  The version I was looking at had the MPS charge at 0.18% (OCF, DFM & TC).  So, cheaper than VLS funds that cost 0.27%.     

That charge% seems in the range that has been quoted for certain investment levels using an MPS for standard pension investments. Presumably there would still be an initial set-up charge for the adviser as well?
This was an issue with the old life insurance / unit investment combined policies - they didn't do either job particularly well, although there were a few circumstances where they were appropriate.They did the job perfectly fine if set up correctly.    The problem wasn't the structure.  The problem was sales process.   When an endowment was set up, the agent could set the target growth rate to hit the sum assured.    The higher the target growth rate, the lower the premium.   So, agents could make theirs look cheaper by increasing the target growth rate.    I have seen endowments with target growths as low as 2.7% p.a. and as high as 13% per annum.     The former would hit target and give a surplus.   The latter would be way off track and give a shortfall.

I was not (in this case) comparing with an endowment, I am thinking more about the old "whole of life policies" which had both an insurance and a unit-linked investment but which were more expensive than keeping them separate. They were supposed to have a trade-in value after a certain number of years, but it was almost always less than the monthly premiums paid, even before insurance premium tax went on. They were indeed sold products, as in those days that was the main way people accessed anything of that nature.

I will state that I have not bought into this annuity replacing bonds method yet.  I see it as an interesting concept.  The figures in the modelling certainly showed it as a viable option and in most periods gave the best outcome.   However, the differences between using different defensive assets (cash, gilts, bonds, annuity etc) was too small to make it a game changer.    It does basically remove the short term risk issues.  i.e. last few years, cash has been best and bonds dire.   In the previous decade, cash was dire, and bonds were best.    An annuity would not have the income volatility and mortality gain gives it a better yield.   But its all about increasing equity content and assuming that equities will give a better outcome that bonds.

Interesting that you, as an expert, are not wholly convinced.

Thanks dunstonh - some comments added in bold to your points.

dunstonh

But this could be the case with an annuity external to the pension drawdown fund. I understand the idea that the annuity income would be tax-free if retained in the pension, but that does seem a bit of "tax-tail wagging" reducing the flexibility.

For larger value investors, tax flexibility could account for a lot of money.     
Lets say you have someone with a 3% income need and is selling units to fund that under drawdown.      They currently have a 50/50 split on the portfolio.        So, one option is to look for the capital amount to buy that income need.   Lets say its 40% of the portfolio.   So, they can move the 60% remaining to equities.  That increases the equity content which should improve long term returns.   Of course, you can do that outside of the pension wrapper at the moment.

Another option is to take the whole bonds allocation to buy an annuity within the pension and the income is not taxed but its not needed at the moment.    So, it buys more in equities.   When it is needed, the amount needed is drawn flexibly with any excess continuing to buy equities.

Another option for those that have quite variable years of income need.   They get the annuity security but only take what they need. Some years it will provide an excess, which they don't take from the pension but leave it in the pension, reduce tax and buy more equities.

That is the normal process for an annuity, and the links from the page mentioned by Bostonerimus1, confirm that you may not get the full purchase price (of this product) returned at death or change of circumstances.

You never get the full purchase price on annuities.  Value protect returns the initial purchase minus annuity payments.      Recent level quotes have been breaking even around 13-14 years.    So, Value protect is a bit like a 13-14 year guarantee.   Often you find that getting a 15 year guarantee works out better value than value protect.   Plus, you have the option for 20-30 year guarantees as alternatives.

I was not (in this case) comparing with an endowment, I am thinking more about the old "whole of life policies" which had both an insurance and a unit-linked investment but which were more expensive than keeping them separate. They were supposed to have a trade-in value after a certain number of years, but it was almost always less than the monthly premiums paid, even before insurance premium tax went on. They were indeed sold products, as in those days that was the main way people accessed anything of that nature.

I get you, but they also had the ability to set minimum, medium or maximum growth rates.  The problem cases are those have been the ones set too high.   So, there are some similarities.     Many of them were also sold in the higher inflation, higher gross return days, and they never thought about lower inflation/lower gross returns.

Interesting that you, as an expert, are not wholly convinced.

I've seen so many claims to be "third way" products over the years that tried and failed that I am naturally sceptical.    More often than not, you cannot reinvent the wheel.

Bostonerimus1

dunstonh said:

But this could be the case with an annuity external to the pension drawdown fund. I understand the idea that the annuity income would be tax-free if retained in the pension, but that does seem a bit of "tax-tail wagging" reducing the flexibility.

For larger value investors, tax flexibility could account for a lot of money.     
Lets say you have someone with a 3% income need and is selling units to fund that under drawdown.      They currently have a 50/50 split on the portfolio.        So, one option is to look for the capital amount to buy that income need.   Lets say its 40% of the portfolio.   So, they can move the 60% remaining to equities.  That increases the equity content which should improve long term returns.   Of course, you can do that outside of the pension wrapper at the moment.

Another option is to take the whole bonds allocation to buy an annuity within the pension and the income is not taxed but its not needed at the moment.    So, it buys more in equities.   When it is needed, the amount needed is drawn flexibly with any excess continuing to buy equities.

Another option for those that have quite variable years of income need.   They get the annuity security but only take what they need. Some years it will provide an excess, which they don't take from the pension but leave it in the pension, reduce tax and buy more equities.

That is the normal process for an annuity, and the links from the page mentioned by Bostonerimus1, confirm that you may not get the full purchase price (of this product) returned at death or change of circumstances.

You never get the full purchase price on annuities.  Value protect returns the initial purchase minus annuity payments.      Recent level quotes have been breaking even around 13-14 years.    So, Value protect is a bit like a 13-14 year guarantee.   Often you find that getting a 15 year guarantee works out better value than value protect.   Plus, you have the option for 20-30 year guarantees as alternatives.

I was not (in this case) comparing with an endowment, I am thinking more about the old "whole of life policies" which had both an insurance and a unit-linked investment but which were more expensive than keeping them separate. They were supposed to have a trade-in value after a certain number of years, but it was almost always less than the monthly premiums paid, even before insurance premium tax went on. They were indeed sold products, as in those days that was the main way people accessed anything of that nature.

I get you, but they also had the ability to set minimum, medium or maximum growth rates.  The problem cases are those have been the ones set too high.   So, there are some similarities.     Many of them were also sold in the higher inflation, higher gross return days, and they never thought about lower inflation/lower gross returns.

Interesting that you, as an expert, are not wholly convinced.

I've seen so many claims to be "third way" products over the years that tried and failed that I am naturally sceptical.    More often than not, you cannot reinvent the wheel.

Good points here. I've followed the path of using my bond allocation to buy lifetime income and then leaving the rest of my invested money as 90% equities, but I only did this because I got a great deal on an index linked DB pension plan buy in from an employer. For most people things like annuities are expensive ways to generate retirement income and so they should be used sparingly and included on the insurance side of your finances. 

I agree that "More often than not, you cannot reinvent the wheel." and the original product press release contains a lot of hype to suggest they have found something "new". Putting an annuity inside a SIPP might be a good way to sell them, but I'd want to see peer reviewed analysis on the utility of it before handing over any money. People have been using DB pensions, annuities, dividends, capital gains etc to fund retirement for many years, but the necessity and opportunity to do that has become far more common in the recent past and with the development of data analysis and computing power retirement academics and professionals have done a lot of research and they often claim to have discovered something that is already known if only they'd do a literature search.