Aviva Long Gilt S^ fund

Linton

JohnWinder said:

I'm back with Alistair on this one. I accept Aviva reasonably believes he might want an annuity in ten years time and starts adjusting the portfolio a al lifestaging with more bonds and less equities. Aviva chooses long bonds; who cares if their value falls 40%, because the consequent higher yield will mean a higher yield when he buys his annuity.

But Alistair doesn't have to be the one holding the longer bonds for that safety net to work. Aviva could have moved him into intermediate or short term bonds which would have seen less collapse in value and thus more money available to buy his annuity which would still be offering a great yield because long bonds' yields are high.  And if Alistair had decided not to buy an annuity (who wants to commit ten years out unless it's necessary?) but still wanted lifestaging to protect his retirement savings somewhat he'd have expected less volatility with shorter term bonds n'est pas, which is what a retirement portfolio wants?

You seem to be suggesting that Aviva should be advising the OP on what best to do in his particular circumstances.  But unless they have the requisite approvals they cannot do that. They have a product on the shelf which either Alistair or his pension scheme  (if this were an employer pension) chose. Aviva cannot make the decision  to move their customer to a different product.

If there was regulated advice to buy a long dated gilt when there was no certainty that an annuity would be bought perhaps there would be a case for claiming against the advisor.

Altior

There's definitely a significant issue, since pension freedoms the vast majority of people will not now purchase an annuity with a dc pot. However it seems to me that the vast majority of default employer provided pensions still apply lifestyling, which is predicated on the pre freedoms legacy of mandated annuities. 

I'm not saying compo is due or anything like that, but this approach is highly unsatisfactory and needs a shake up. How difficult would it be for these firms to present the choice, and the individual opts in to either a drawdown objective or annuity objective (obviously explaining what they entail).

Everything seems to be dumbed down to the nth degree nowadays, but something as complex as this, ie lay people expected to know that their entire retirement strategy outside of state support is based on an (obsolete) assumption that they will be purchasing an annuity upon retiring is a very poor state of affairs in my opinion. 

Linton

Altior said:

There's definitely a significant issue, since pension freedoms the vast majority of people will not now purchase an annuity with a dc pot. However it seems to me that the vast majority of default employer provided pensions still apply lifestyling, which is predicated on the pre freedoms legacy of mandated annuities. 

I'm not saying compo is due or anything like that, but this approach is highly unsatisfactory and needs a shake up. How difficult would it be for these firms to present the choice, and the individual opts in to either a drawdown objective or annuity objective (obviously explaining what they entail).

Everything seems to be dumbed down to the nth degree nowadays, but something as complex as this, ie lay people expected to know that their entire retirement strategy outside of state support is based on an (obsolete) assumption that they will be purchasing an annuity upon retiring is a very poor state of affairs in my opinion. 

I agree there is there is a major problem with pension freedoms and many people's level of numeracy and understanding.  

However the premise that the majority of people will not now be using an annuity is I think wrong.  Firstly aince the increase in interest rates buying an annuity is much more justifiable than say 5 years ago.  Secondly annuities in principle do provide a good answer to many people's retirement finance needs.

dunstonh

JohnWinder said:

I'm back with Alistair on this one. I accept Aviva reasonably believes he might want an annuity in ten years time and starts adjusting the portfolio a al lifestaging with more bonds and less equities. Aviva chooses long bonds; who cares if their value falls 40%, because the consequent higher yield will mean a higher yield when he buys his annuity.

But Alistair doesn't have to be the one holding the longer bonds for that safety net to work. Aviva could have moved him into intermediate or short term bonds which would have seen less collapse in value and thus more money available to buy his annuity which would still be offering a great yield because long bonds' yields are high.  And if Alistair had decided not to buy an annuity (who wants to commit ten years out unless it's necessary?) but still wanted lifestaging to protect his retirement savings somewhat he'd have expected less volatility with shorter term bonds n'est pas, which is what a retirement portfolio wants?

Aviva doesn't hold either the advisory permissions or discretionary permissions to make those changes.  Changes like that are either his choice or his adviser's choice.

It's just like any fund remit. They have to stick to it, whether it's the best or the worst place because the remit is to do it that way unless told otherwise.   Aviva pensions have a range of funds available.

No option is going to be perfect.   That said, I suspect the long gilt fund is not the only fund held.  Typically, the Aviva lifestyle options use 3 or more funds, depending on the stage of the lifestyling.   

masonic

JohnWinder said:

I'm back with Alistair on this one. I accept Aviva reasonably believes he might want an annuity in ten years time and starts adjusting the portfolio a al lifestaging with more bonds and less equities. Aviva chooses long bonds; who cares if their value falls 40%, because the consequent higher yield will mean a higher yield when he buys his annuity.

But Alistair doesn't have to be the one holding the longer bonds for that safety net to work. Aviva could have moved him into intermediate or short term bonds which would have seen less collapse in value and thus more money available to buy his annuity which would still be offering a great yield because long bonds' yields are high.  And if Alistair had decided not to buy an annuity (who wants to commit ten years out unless it's necessary?) but still wanted lifestaging to protect his retirement savings somewhat he'd have expected less volatility with shorter term bonds n'est pas, which is what a retirement portfolio wants?

But what if there was a deep recession and central banks cut rates to near zero and started printing money again? Those intermediate and short term bonds wouldn't have soared in price as much as the long bonds, while annuity rates would have plummeted. So there would have been an income shortfall at the point of retirement, which spells disaster for the retiree and is the risk lifestaging is designed to insure against. The target market for lifestaging is the individual who has built up a sufficient pot to provide their desired retirement income today, and wishes to ensure that is still the case tomorrow. So they want to, as close as is practical, lock in the annuity income they can buy with that retirement pot. They sacrifice the potential to secure more for the confidence they will not end up with less.

JohnWinder

Nicely put.

Altior

Linton said:

Altior said:

There's definitely a significant issue, since pension freedoms the vast majority of people will not now purchase an annuity with a dc pot. However it seems to me that the vast majority of default employer provided pensions still apply lifestyling, which is predicated on the pre freedoms legacy of mandated annuities. 

I'm not saying compo is due or anything like that, but this approach is highly unsatisfactory and needs a shake up. How difficult would it be for these firms to present the choice, and the individual opts in to either a drawdown objective or annuity objective (obviously explaining what they entail).

Everything seems to be dumbed down to the nth degree nowadays, but something as complex as this, ie lay people expected to know that their entire retirement strategy outside of state support is based on an (obsolete) assumption that they will be purchasing an annuity upon retiring is a very poor state of affairs in my opinion. 

I agree there is there is a major problem with pension freedoms and many people's level of numeracy and understanding.  

However the premise that the majority of people will not now be using an annuity is I think wrong.  Firstly aince the increase in interest rates buying an annuity is much more justifiable than say 5 years ago.  Secondly annuities in principle do provide a good answer to many people's retirement finance needs.

Identified some FCA data, marries up to what seemed instinctively likely, drawdown significantly supersedes annuity.

We have collected data on the retirement income market since April 2015. The data enables us to monitor developments in the market, for example, to gain insights into what action consumers take the first time they access a pension pot.

Linton

Altior said:

Linton said:

Altior said:

There's definitely a significant issue, since pension freedoms the vast majority of people will not now purchase an annuity with a dc pot. However it seems to me that the vast majority of default employer provided pensions still apply lifestyling, which is predicated on the pre freedoms legacy of mandated annuities. 

I'm not saying compo is due or anything like that, but this approach is highly unsatisfactory and needs a shake up. How difficult would it be for these firms to present the choice, and the individual opts in to either a drawdown objective or annuity objective (obviously explaining what they entail).

Everything seems to be dumbed down to the nth degree nowadays, but something as complex as this, ie lay people expected to know that their entire retirement strategy outside of state support is based on an (obsolete) assumption that they will be purchasing an annuity upon retiring is a very poor state of affairs in my opinion. 

I agree there is there is a major problem with pension freedoms and many people's level of numeracy and understanding.  

However the premise that the majority of people will not now be using an annuity is I think wrong.  Firstly aince the increase in interest rates buying an annuity is much more justifiable than say 5 years ago.  Secondly annuities in principle do provide a good answer to many people's retirement finance needs.

Identified FCA some data, marries up to what seemed instinctively likely, drawdown significantly supersedes annuity.

We have collected data on the retirement income market since April 2015. The data enables us to monitor developments in the market, for example, to gain insights into what action consumers take the first time they access a pension pot.

But it was only in the second half of  2022 that annuity rates significiantly increased so it is a little early to come to any conclusions.

If you retire at 65 and have no wish to leave a significant sum to your beneficiaries an RPI linked annuity would now give you around 4.4% of your initial investment against the 3.5% or lower Safe Withdrawal Rate for drawdown. 

gm0

Why do you think default funds are so middle of the road and bland ?  Defensible as as "safe" as anything else can be in this sphere.  To probably not ruin you in a wide range of cases. Based on the data.  For a wide range of retirement cohorts . 

A lot of lifestylers added different flavours for annuity, drawdown, lump sum.  Onus is still on the member to choose  the appropriate one or make a change due to circumstances changing. 

The annuity lifestyler has (for the reasons I explained upthread) regulator finger prints on it. 
It solved a real problem that actually existed and hurt real people. And then legislation was changed again annuity age limit going and drawdown arriving. Various world events cut across the economy (GFC, QE, Covid, Wars).  It turns out.  A partial solution to "problem A" can aggravate a different "problem B" in other circumstances. Who could have guessed.

The answer is not to get rid of it to "not have it" available.  Problem A still exists while fixed date of purchase annuties continue.  An answer doesn't have to be perfect to be the least worst available. 

Tweak the product - then we just change the conditions so that version is worse.  Like debating sustainable withdrawal rates

So the addressable problem actually moves to how best to promote properly informed choice in a complex environment - across a very wide range of assumed knowledge  from basic maths and english - before you get to personal finance education and how bonds/funds work and stock markets etc.

FCA and "pathways" initiative is just tinkering at the edges without knocking over the market stall. 

The brave answer politically IMHO is to sweep the individual DC drawdown problem largely off the table for the person in the street.  It may well hang around as a niche - mass affluent and actual internationally mobile wealthy. 

Make a national pooled DC / defined ambition scheme with big employers. And then progressively sweep all DB into it.  New first.  Facing down the many enemies of change.  DC pot inheritors (who won't like funding death pooling with 2nd death confiscation - partial or complete).  Gold plated public sector DB clinger ons (who won't like their zombie schemes ending or this latest version of a "new" vs "old" based on join date. "Fairness" definers who don't like "smoothing" and retained profits philosophically - fixing his sequence risk - is stealing *my* returns.  Let them suffer. It's not fair.

Base income from contributions.  Smoothed profits.  Massive scale investment management to drive out cost. Crowding out duplicated costs and rentiers thriving on complexity (with some related loss of taxes accepted as the price of nixing some spivs). 

Altior

But it was only in the second half of  2022 that annuity rates significiantly increased so it is a little early to come to any conclusions.

If you retire at 65 and have no wish to leave a significant sum to your beneficiaries an RPI linked annuity would now give you around 4.4% of your initial investment against the 3.5% or lower Safe Withdrawal Rate for drawdown

Obviously the approach that pension firms would/should take is based on historical evidence, and that shows Drawdown outnumbers Annuities by a significant multiple. So their typical default fund approach still assumes an annuity approach, when annuities are purchased with less than 10% of new pension funds being accessed.

There's no way in the world that trend is going to flip back to majority annuities based on short term pricing. It may have an immaterial marginal impact. I'm not debating here which option is better, that's irrelevant. I'm looking at the default approach used by pension companies which is at complete odds with what consumers are actually doing in practice.