Annuity beats drawdown

OldScientist

zagfles said:

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. 

According to the FCA data at https://www.fca.org.uk/data/retirement-income-market-data-2021-22/interactive-analysis-2021-22 (2021-2022 is the latest I can find - the FCA appear to have ceased to collect/publish this info), in October 2021 to March 2022, 87% of annuities sold were level and 13% escalating (I assume the latter includes both RPI and fixed escalations). My suspicion is that our recent brush with high inflation may have increased the proportion of RPI annuities sold, but can find no evidence to support this.

In terms of the past, when life expectancies were lower, annuity rates for a given gilt yield were higher. For example, in 1960 when yields were only a bit more than now, a 65 year old male could have obtained a level annuity with a payout rate of just over 10% (see Figure 2 of Cannon and Tonks at http://eprints.lse.ac.uk/24832/1/dp444.pdf ). Of course, inflation still eroded this and caused many pensioners in the 1970s to struggle with inflation (no triple lock with the state pension then).

Qyburn

ukdw said:

Not sure how reliable this site is ...

They're an outfit that sells annuities, so expect quite a lot of bias.

zagfles

OldScientist said:

zagfles said:

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. 

According to the FCA data at https://www.fca.org.uk/data/retirement-income-market-data-2021-22/interactive-analysis-2021-22 (2021-2022 is the latest I can find - the FCA appear to have ceased to collect/publish this info), in October 2021 to March 2022, 87% of annuities sold were level and 13% escalating (I assume the latter includes both RPI and fixed escalations). My suspicion is that our recent brush with high inflation may have increased the proportion of RPI annuities sold, but can find no evidence to support this.

In terms of the past, when life expectancies were lower, annuity rates for a given gilt yield were higher. For example, in 1960 when yields were only a bit more than now, a 65 year old male could have obtained a level annuity with a payout rate of just over 10% (see Figure 2 of Cannon and Tonks at http://eprints.lse.ac.uk/24832/1/dp444.pdf ). Of course, inflation still eroded this and caused many pensioners in the 1970s to struggle with inflation (no triple lock with the state pension then).

Quite shocking really. I expected it to be high but not that high! There again there've been various threads here where even amongst MSE regulars, who understand finance far better than the average person in the street, there's a lack of understanding about inflation or a head in the sand attitude towards it. Most people actually seem to believe that getting 5% interest on their savings when inflation is 5% is better than getting 1% interest when inflation is 1% !!

sgx2000

I have been looking at Single life as my wife is 17 years younger than me.
If I included her the quotes drop significantly...

And given that 
She has her own pension and the house is fully paid up.... 

I would imagine that joint policies where a lot more relevant when people all rented in retirement...

westv

zagfles said:

OldScientist said:

zagfles said:

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. 

According to the FCA data at https://www.fca.org.uk/data/retirement-income-market-data-2021-22/interactive-analysis-2021-22 (2021-2022 is the latest I can find - the FCA appear to have ceased to collect/publish this info), in October 2021 to March 2022, 87% of annuities sold were level and 13% escalating (I assume the latter includes both RPI and fixed escalations). My suspicion is that our recent brush with high inflation may have increased the proportion of RPI annuities sold, but can find no evidence to support this.

In terms of the past, when life expectancies were lower, annuity rates for a given gilt yield were higher. For example, in 1960 when yields were only a bit more than now, a 65 year old male could have obtained a level annuity with a payout rate of just over 10% (see Figure 2 of Cannon and Tonks at http://eprints.lse.ac.uk/24832/1/dp444.pdf ). Of course, inflation still eroded this and caused many pensioners in the 1970s to struggle with inflation (no triple lock with the state pension then).

Quite shocking really. I expected it to be high but not that high! There again there've been various threads here where even amongst MSE regulars, who understand finance far better than the average person in the street, there's a lack of understanding about inflation or a head in the sand attitude towards it. Most people actually seem to believe that getting 5% interest on their savings when inflation is 5% is better than getting 1% interest when inflation is 1% !!

As has been mentioned in the thread, a level annuity does give you front loading of income. That may suit someone if they also have the SP further down the line. Yes, you don't know how inflation will eat away at it but it's the reverse with an inflation linked annuity. Your income remains stable in relation to prices but you might end up wishing you'd had more early on.

zagfles

westv said:

zagfles said:

OldScientist said:

zagfles said:

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. 

According to the FCA data at https://www.fca.org.uk/data/retirement-income-market-data-2021-22/interactive-analysis-2021-22 (2021-2022 is the latest I can find - the FCA appear to have ceased to collect/publish this info), in October 2021 to March 2022, 87% of annuities sold were level and 13% escalating (I assume the latter includes both RPI and fixed escalations). My suspicion is that our recent brush with high inflation may have increased the proportion of RPI annuities sold, but can find no evidence to support this.

In terms of the past, when life expectancies were lower, annuity rates for a given gilt yield were higher. For example, in 1960 when yields were only a bit more than now, a 65 year old male could have obtained a level annuity with a payout rate of just over 10% (see Figure 2 of Cannon and Tonks at http://eprints.lse.ac.uk/24832/1/dp444.pdf ). Of course, inflation still eroded this and caused many pensioners in the 1970s to struggle with inflation (no triple lock with the state pension then).

Quite shocking really. I expected it to be high but not that high! There again there've been various threads here where even amongst MSE regulars, who understand finance far better than the average person in the street, there's a lack of understanding about inflation or a head in the sand attitude towards it. Most people actually seem to believe that getting 5% interest on their savings when inflation is 5% is better than getting 1% interest when inflation is 1% !!

As has been mentioned in the thread, a level annuity does give you front loading of income. That may suit someone if they also have the SP further down the line. Yes, you don't know how inflation will eat away at it but it's the reverse with an inflation linked annuity. Your income remains stable in relation to prices but you might end up wishing you'd had more early on.

It's a pretty rubbish way of front loading income. You don't know how much you're front loading it by. If you want more income early on, then work out how much and maybe get a fixed term annuity or a gilts ladder for the early years. 

RogerPensionGuy

zagfles said:

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. 

zagfles said:

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. 

Just to add an observation, IFAs presumably do better personally by looking at a clients investments sliding up and down via their changes. 

I know a fair few people with very healthy SIPPs being kindly looked after my IFAs and paying various charges, I rarely hear of these IFAs pointing towards annuities even though some clients would like a good old solid income % and be less fixated on market ups and, plus IFAs telling them to reduce income in downturns. 

Funny these IFAs don't ever reduce charges or % when these pots sink down, their charges appear very stable with looking after these big old pot.

People say 3 or 4% is a SWR for SIPPs generally, 3% in my books.

I'm happy to be in a simple drawdown SIPP with low charges and a few very standard global units ticking over, I'm personally happy not paying in my opinion the extra charges I feel unnecessary for me, my security feeling is just possibly under picking out cash from my SIPP and watching pot grow over time and harvest it hard when ever I fancy.

Reference annuities, yes inflation can hurt them, but in the years say 60 to 74 theses annuities can really help with cash flows in the liklihood more active and spending periods of retirement. 

I would certainly consider an annuity. 

michaels

sgx2000 said:

I have been looking at Single life as my wife is 17 years younger than me.
If I included her the quotes drop significantly...

And given that 
She has her own pension and the house is fully paid up.... 

I would imagine that joint policies where a lot more relevant when people all rented in retirement...

Our plan is that on the first death income is only reduced by the lost state pension, approx. 20% of household income based on what we think is a realistic assessment of how costs for 2 living together compare to costs for 1 living alone.

OldScientist

sgx2000 said:

I have been looking at Single life as my wife is 17 years younger than me.
If I included her the quotes drop significantly...

And given that 
She has her own pension and the house is fully paid up.... 

I would imagine that joint policies where a lot more relevant when people all rented in retirement...

As an alternative, you could consider a guarantee period that, for example, would take her to state pension age.

I think joint policies may have been quite useful in an era (not that long ago) where many women didn't have their own source of retirement income.

OldScientist

zagfles said:

westv said:

zagfles said:

OldScientist said:

zagfles said:

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. 

According to the FCA data at https://www.fca.org.uk/data/retirement-income-market-data-2021-22/interactive-analysis-2021-22 (2021-2022 is the latest I can find - the FCA appear to have ceased to collect/publish this info), in October 2021 to March 2022, 87% of annuities sold were level and 13% escalating (I assume the latter includes both RPI and fixed escalations). My suspicion is that our recent brush with high inflation may have increased the proportion of RPI annuities sold, but can find no evidence to support this.

In terms of the past, when life expectancies were lower, annuity rates for a given gilt yield were higher. For example, in 1960 when yields were only a bit more than now, a 65 year old male could have obtained a level annuity with a payout rate of just over 10% (see Figure 2 of Cannon and Tonks at http://eprints.lse.ac.uk/24832/1/dp444.pdf ). Of course, inflation still eroded this and caused many pensioners in the 1970s to struggle with inflation (no triple lock with the state pension then).

Quite shocking really. I expected it to be high but not that high! There again there've been various threads here where even amongst MSE regulars, who understand finance far better than the average person in the street, there's a lack of understanding about inflation or a head in the sand attitude towards it. Most people actually seem to believe that getting 5% interest on their savings when inflation is 5% is better than getting 1% interest when inflation is 1% !!

As has been mentioned in the thread, a level annuity does give you front loading of income. That may suit someone if they also have the SP further down the line. Yes, you don't know how inflation will eat away at it but it's the reverse with an inflation linked annuity. Your income remains stable in relation to prices but you might end up wishing you'd had more early on.

It's a pretty rubbish way of front loading income. You don't know how much you're front loading it by. If you want more income early on, then work out how much and maybe get a fixed term annuity or a gilts ladder for the early years. 

While I fully agree about the gilts ladder provided it is inflation linked, income from a nominal fixed term annuity will suffer from inflation risk (as far as I am aware, but am happy to wrong, RPI protected fixed term annuities are only offered from advised sales - at least that is the case for L&G).