Annuity beats drawdown

sgx2000

michaels said:

sgx2000 said:

Currently
with £120,000 DC pension pot

I can get £9207  -  Flat ,No TFLS, 10 year garranty Annuity (couple of medical conditions)

At 4% Drawdown I would be starting at £4800

I understand the differences between annuities and drawdown
And the pluses and minuses of each
And Inflation
And lack of pot to be inherited

 - But

That difference is HUGE

If you compare apples with oranges in terms of which is most orange then the orange wins by miles.

OP based on the question is would appear that you do not understand the two strategies you are comparing or you would realise that is is a silly comparison.  Apologies for sounding harsh but without a proper understanding you could make an expensive mistake.

No appology needed....
I do understand both options (or the choice of a split option)
and was just pointing out the very large initial differences ( even though they are not the same thing)
Pehaps I may choose Bananas... lol

I suspect that I, like many,  just struggle with choices that are not just logic based...

Things like....

Guessing how long I may live
Deciding on my attitude to risk levels
Hoping that I will still have the mental accuity to be able manage investments as I age..
Or, choosing a safe, but lower, annuity

I supose that If I had a pension as large as many posters here have I may be a little more decisive
Or Maybe not... again lol

I do however owe a huge thanks to all the patient members of this forum for all the advice, and comments, I have received over the last couple of years.

sgx2000

MEM62 said:

sgx2000 said:

I, like many on here, approaching retirement. 
Can remember inflation at 20%....
That frightens the hell out of me....

What were interest rates doing when inflation was 20%

I cant remember
But you can be certain they where not 20% or even near it

artyboy

sgx2000 said:

I, like many on here, approaching retirement. 
Can remember inflation at 20%....
That frightens the hell out of me....

Which leads me to wonder why you are giving any real consideration to a non-indexed annuity?

ISTBC, but that said, even indexed ones (outside the public sector) tend to be capped at 3 or 5%, so in another black swan like inflation event, indexing could only provide partial protection. 

Malthusian

Annuities are generally fully index linked. You can get annuities linked to the Limited Prices Index, but god knows why you would want to, as index linked annuities only make sense if you are worried about prolonged runaway inflation. (Without runaway inflation you will typically have to live to your mid-80s or longer before the inflation linked annuity catches up with a level annuity and makes up for all the income forgone in the early years.)

sgx2000 said:

I, like many on here, approaching retirement. 
Can remember inflation at 20%....
That frightens the hell out of me....

As artyboy says it doesn't make a lot of sense to be considering a level annuity in that situation.

If inflation is running at 20% per annum then you want one of two things. Either to still be in drawdown and mostly invested in equities, because it means your pension can still be invested in companies and assets that benefit from prices increasing by 20% every year because they are the ones increasing them. Or a fully index linked annuity. The one thing you don't want is a level annuity or any other fixed income.

westv

How did people get on when the majority of annuity sales were on a level basis?

OldScientist

sgx2000 said:

Currently
with £120,000 DC pension pot

I can get £9207  -  Flat ,No TFLS, 10 year garranty Annuity (couple of medical conditions)

At 4% Drawdown I would be starting at £4800

I understand the differences between annuities and drawdown
And the pluses and minuses of each
And Inflation
And lack of pot to be inherited

 - But

That difference is HUGE

I know others have mentioned about the lack of inflation protection with a level annuity, but the following graph shows the effect of historical UK inflation on level annuity income at the following percentiles: 0th (i.e. worst case),  10th, 25th, 50th (i.e. median), and 75th. I've assumed the potential for a 35 year retirement.



In the worst cases (35 year periods starting in the 1960s and 1970s), your £9.2k was, in real terms, eroded to about £2.5k after 10 years and £1.5k after 20 years. Even in the median case, the income dropped to about £6.5k after 10 years and £4.5k after 20 years (the latter, coincidentally, about the same as you'd currently get from an RPI annuity with 100% survivor benefit).

However, given your SP and DB pension (index linked?) covers your expenditure, buying the annuity may be a useful way to front load your retirement expenditure, i.e., in the early years when you remain active and might want to spend more.

Alternatively, you could front load drawdown by withdrawing 7.7% of the current portfolio value (i.e., not inflation linking the income) with historical outcomes as follows (I've used a 60/40 portfolio with asset returns from macrohistory.net)



After 10 and 20 years, the income from drawdown tended to be similar to or worse than that from the annuity, however, there was money left in the portfolio (in real terms, about half after 20 years in the median case).

Choosing an RPI annuity or using inflation linked withdrawals will provide a flatter income profile.

GazzaBloom

zagfles said:

GazzaBloom said:

So handing your money to an insurance company who will take on the risk and invest it to generate your guaranteed pay out plus their own handsome profits based on your expected remaining life span and have nothing left to pass on on your death is better than you retaining the risk and investing it yourself and only paying minimal fees and having any residual funds to pass on as legacy when you die?

There's no magic in annuities, you either pay someone to take on market risk and they will make profit in the deal, or you retain the risk yourself and keep what you have.

You really think they take on market risk? What do you think they'd do if there was a prolonged downturn, where would they get the money from to pay the income? They don't take market risk (or minimal at least). They buy rock solid safe investments like gilts (index linked for IL annuities) and similar. 

They take longevity risk, but that can be spread, some will die young, some will live to over 100, and those dying young cross subside those who live to 100. It's not like market risk where a downturn would affect everybody. Unless someone invents a magic pill that extends everyone' life to 150 !!

Rock solid? what like the ones the BOE had to buy by the billions to prop up the market when Liz Truss turned the ship suddenly?

No risk there then...

Notepad_Phil

westv said:

How did people get on when the majority of annuity sales were on a level basis?

Do we know what the percentages are between level and index linked?

And I wonder how many people take them out on a single-life basis as well?

Mrs Notepad's mum only had a ten year payment period on her husband's level basis annuity when she was widowed - she then lived for close to another 30 years, so even if the annuity had continued the level basis would have meant that it was continuously being eroded away.

zagfles

GazzaBloom said:

zagfles said:

GazzaBloom said:

So handing your money to an insurance company who will take on the risk and invest it to generate your guaranteed pay out plus their own handsome profits based on your expected remaining life span and have nothing left to pass on on your death is better than you retaining the risk and investing it yourself and only paying minimal fees and having any residual funds to pass on as legacy when you die?

There's no magic in annuities, you either pay someone to take on market risk and they will make profit in the deal, or you retain the risk yourself and keep what you have.

You really think they take on market risk? What do you think they'd do if there was a prolonged downturn, where would they get the money from to pay the income? They don't take market risk (or minimal at least). They buy rock solid safe investments like gilts (index linked for IL annuities) and similar. 

They take longevity risk, but that can be spread, some will die young, some will live to over 100, and those dying young cross subside those who live to 100. It's not like market risk where a downturn would affect everybody. Unless someone invents a magic pill that extends everyone' life to 150 !!

Rock solid? what like the ones the BOE had to buy by the billions to prop up the market when Liz Truss turned the ship suddenly?

No risk there then...

No gilts were defaulted on. So yeah, as rock solid as you can get. The Truss farce made them and hence annuities reasonable value at last. 

zagfles

westv said:

How did people get on when the majority of annuity sales were on a level basis?

I think they still are. There seems to be a lot of people, including some IFAs, who don't really understand the point of annuities when they waffle on about break-even points based on guesses about inflation. If you want to guess about stuff, even educated guesses based on history, then why not guess about equity returns, and use drawdown. If you want safe, then index linked is the only way to go.