Annuity beats drawdown

zagfles

OldScientist said:

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).

Really? Though not a lot of benefit in a fixed term annuity over a gilts ladder anyway, may as well just buy an IL gilts ladder. I've done it for pre-SPA income. 

SouthCoastBoy

I often hear about gilts ladders, but have no idea how to buy at par? I assume you need to buy at par otherwise the ladder is tainted by market forces?

sgx2000

OldScientist said:

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.

My quotes have been with a 10 year guarantee.....
Given we own our home and have no debts ....
When i eventually "snuff it"  with her own pension, state pension and whatever savings we have...
I am certain she would have a very comfortable retirement....

NedS

SouthCoastBoy said:

I often hear about gilts ladders, but have no idea how to buy at par? I assume you need to buy at par otherwise the ladder is tainted by market forces?

When building a gilts/bond ladder, the intention would be to hold to maturity so market forces in the interim are irrelevant. At the time of purchase, you know exactly what the return will be (if held to maturity). If markets move in your favour in the meantime, of course you can sell early, but if markets move detrimentally, you can hold to maturity for that known return.

zagfles

SouthCoastBoy said:

I often hear about gilts ladders, but have no idea how to buy at par? I assume you need to buy at par otherwise the ladder is tainted by market forces?

No you don't buy at par, you buy at the current price which is at moment is generally under par for index linked gilts with low coupons, and for higher coupons it's over par but accounting for the interest you still make a real return. 

So the purchase is subject to market forces, just like the purchase of an annuity is - you get a much better value annuity now than you did 3 years ago due to market forces. But once you've bought, as long as you hold to maturity, which is the whole point of a gilts ladder, you're not subject to market forces. 

See these threads:
Filling the gap to state/db pension using an index linked bond ladder in SIPP - how? — MoneySavingExpert Forum

Index Linked Gilts — MoneySavingExpert Forum