Why buy annuity

Cus

zagfles said:

Cobbler_tone said:

zagfles said:

Cobbler_tone said:

But £25k (for a couple) are protected from inflation to a certain extent, unless you mean if the state pension is frozen, which is a different conversation. Hence why those in later life are normally more concerned about savings rates as opposed to mortgage rates and inflation.

I’d say the families pulling in £40k a year, with a hefty mortgage and 3 kids, running a car etc are more vulnerable to large spikes in inflation. People in that category must be really feeling the pinch. 

The family on £40k would likely get pay increases in line with inflation

Not many working folk kept up with inflation recently. Hence the ‘cost of living crisis’, which I’m not sure was an actual thing judging by the queues at Costa.

Over the longer term they did. The "cost of living crisis" as you imply was mainly a soundbite for sensationalist journalists and politicians trying to score political points. 

I'm sure you have a point that it was used to score political points, but the increased cost of food and energy, and the increased cost of personal borrowing to pay for that, and the increase in food bank use etc shows to me that it was mainly a reality 

zagfles

LHW99 said:

MK62 said:

zagfles said:

OldScientist said:

zagfles said:

OldScientist said:

Finally, since I said I'd include another couple of historical cases, here are 1910 (fairly bad for stock/bond portfolio) and 1970 (actually OK for stock/bond portfolio - note the target WR of 5% instead of 3.5% - but horrible inflation). In each case, the highest annuity payout rate is for a single life level annuity aged 67 based on historic yields and modern mortality rates.





For the 1910 case there was deflation during the 1920s (that's why the income from the annuity goes back up - IIRC, the last occasion when we had some deflation in RPI was 2008). The large effect of inflation on the annuity income during the 1970s can also be seen and the annuity only marginally improves things even at the highest payout rate. However, in each of the example cases, provided the payout rate was high enough, the level annuity improved the outcome compared to just running drawdown. In some respects, this should not be too surprising since the retiree is swapping bonds held in their portfolio for a collapsing bond ladder held by the insurance company (with a small boost due to mortality rates).

I've looked at this in a more systematic way and found that provided the payout rate for a level annuity exceeded a threshold of somewhere between 5.5 and 6.0% it would have improved the outcomes for the worst historical cases in the UK.

I might have missed something but the 1970 graphs seem to show income plummetting in about 1992/3 with the pure drawdown but 1987 with the DD/8.5% annuity. Or are you adding a couple of decades of the continuing 0.5% or so annuity income? 

It is the 'providing the annuity payout was high enough' part of the highlighted sentence that is critical. With a payout of 10.5%, the portfolio expired about the same time as it did with no annuity - in other words the payout needed to be higher than that to improve the longevity of the full income (at the time, the annuity rates for 65yo males were about 14% because of the shorter life expectancies). While there is residual annuity income, in real terms, it is definitely in the 'slightly better than nothing' category!

It comes back to what I think we all agree on - it is not possible at the start of retirement to predict whether relying solely on drawdown or buying an annuity of either level or RPI type will, by the end of retirement have provided the most income. In other words, the choice is more about securing the properties of income profile (e.g., constant floor, front loading, etc.) required than maximising. There is also some element of suiting the required complexity.

Indeed, it's never been about what gives the highest lifetime income, which as you say is unpredictable, but about what is "safe" in the same way as SWRs. 

"Safe" obviously needs a different definition for flat annuities as you know for certain your income will fall in real terms, so a fairly simple definition may be that real income doesn't fall to less than 50% over 20 years, or 30% over 30. Actually probably better to do it by reference to the initial pot value, so maybe 2 or 3% of the pot. 

Be interesting to compare with drawdown in terms of "safety", but instead of using SWRs start with the sort of amount a flat annuity would pay, eg 7.5% of the pot, and reduce the draw in real terms annually by 4%, sort of replicating a flat annuity with average inflation, but then once the minimum is hit (eg 2 or 3% of pot), keep the real draw fixed. Does that succeed more often than a flat annuity? 

If anything front loaded drawdown should be safer generally than fixed as you're drawing more earlier, but there will be exceptions. 

With respect, what has never been about what gives the highest lifetime income?

A high income when retired is nice, but what I aim for is a retirement income that a) isn't going to drop like a stone when I can't do anything about it. b) that ensure that I and the OH will have a reasonably comfortable income, whichever of us goes first and c) doesn't require too much thinking about / form filling as the marbles keep disappearing!

That may not in fact be the highest possible lifetime income - but it'll do.

Yup. So when deciding what income you need you need to look at the likelyhood of that income lasting, and not dropping below a level which would cause you hardship. 

So if using drawdown, a "SWR" is a common yardstick. If using a flat annuity, the same thought process should follow. Eg what is the minimum real income I want from the annuity in say 20 or 30 years. Then perhaps model it historically like the SWR is to see if the flat annuity is ever likely to drop below that level. 

It does seem the thought process is completely different though. When discussing flat vs index linked people go on about IL or inflation protection being "expensive" ie it's like a nice feature but they can't afford it. Rather than looking at it from the other side like with SWRs, that being "safe" won't give them enough income.

Fair enough, you need to take a risk. Whether you drawdown at above the SWR or you use a flat annuity. But understand that risk so you can quantify it and compare it with other risks you could take instead. It doesn't make sense to work out SWR based on 150 years of stockmarket data yet ignore inflation risk going back just 60 years. 

Financial advisers, from what I've heard and read, are generally pretty useless at this. If going into drawdown they'll get out timeline and model historically going back 150 years. If buying a flat annuity they won't do the same, they'll just come out with some useless cutover comparison based on guesses about inflation rather than modelling actual historic inflation sequences. 

williaa100

I am seriously considering chopping in my SIPP for an annuity now that the IHT rules have changed. Ideally I'd like to do this via a "fee for service" IFA, but I dont want advice on my overall situation, just on the annuity. A couple I have contacted locally arent interested in working on that basis. Anyone know any reputable IFAs who will be happy to advise on an annuity + purchased life annuity without wanting to also manage ISAs etc., please? Thank you.

incus432

williaa100 said:

I am seriously considering chopping in my SIPP for an annuity now that the IHT rules have changed. Ideally I'd like to do this via a "fee for service" IFA, but I dont want advice on my overall situation, just on the annuity. A couple I have contacted locally arent interested in working on that basis. Anyone know any reputable IFAs who will be happy to advise on an annuity + purchased life annuity without wanting to also manage ISAs etc., please? Thank you.

I had the same problem finding an IFA who would do this ( I was advised to ask if they would do it on an 'Execution only' basis). I approached eight by email, and seven would only arrange an annuity if if I had a full financial review with them (at a cost of many 000s).  The reasons for refusing looked completely spurious but that's by the way. The last one was on holiday when I emailed and by the time he returned and agreed to do it (at a fee of 1% of the pot) I had already gone via Retirement Line*. They charged about 1.5% but were extremely thorough and efficient. 

The IFA is based in Stockport if you want details.  You could also try getting a quote from Sharing Pensions which seems to be run by an IFA. https://www.sharingpensions.co.uk/annuity_quote.htm

*A large specialist annuity broker

Hoenir

zagfles said:

Hoenir said:

zagfles said:

Most of us here were probably kids in the high inflation period of the 70s. What do you remember? I remember us being fine, our parents being fine and not struggling for money, but grandparents (ie the pensioners of the time) generally being poor.

The world changed in the early 70's when banks were set free. Able to leverage their balance sheets and use fractional reserve banking to their benefit. There's a great easy to comprehend book called 

How an Economy Grows and Why It Crashes

Who knows perhaps another economic era is drawing gradually to a close. 

Yes perhaps things have changed fundamentally and historic data is irrelavant as the world doesn't work as it used to. If historic data (say over 50 years old) is not relevant, then you could argue the SWR from a drawdown pension might be 8% or so, as that seems to be the worst case based on mid 70's onwards.

So if you're not worried about what happened over 50 years ago, then why buy a flat annuity at 7.5% when you could drawdown at 8% increasing with inflation? 

The maths doesn't fundamentally change though. Hence the 4 most expensive words in the English languge. "This Time is Different".  Never is. We are still addressing issues left behind from the GFC. As an individual boils down to whether you re lucky or not depending on timing. The search for the Holy Grail continues. 

zagfles

Hoenir said:

zagfles said:

Hoenir said:

zagfles said:

Most of us here were probably kids in the high inflation period of the 70s. What do you remember? I remember us being fine, our parents being fine and not struggling for money, but grandparents (ie the pensioners of the time) generally being poor.

The world changed in the early 70's when banks were set free. Able to leverage their balance sheets and use fractional reserve banking to their benefit. There's a great easy to comprehend book called 

How an Economy Grows and Why It Crashes

Who knows perhaps another economic era is drawing gradually to a close. 

Yes perhaps things have changed fundamentally and historic data is irrelavant as the world doesn't work as it used to. If historic data (say over 50 years old) is not relevant, then you could argue the SWR from a drawdown pension might be 8% or so, as that seems to be the worst case based on mid 70's onwards.

So if you're not worried about what happened over 50 years ago, then why buy a flat annuity at 7.5% when you could drawdown at 8% increasing with inflation? 

The maths doesn't fundamentally change though. Hence the 4 most expensive words in the English languge. "This Time is Different".  Never is. We are still addressing issues left behind from the GFC. As an individual boils down to whether you re lucky or not depending on timing. The search for the Holy Grail continues. 

It was you going on about "the world changed" and economic eras drawing to a close! 

My point was, if historic data from 50+ years ago is relevant, then inflation history as well as stockmarket history are equally relevant. Do you want to argue that point? 

PS I'm not trying to find the Holy Grail. I just think people need to to look at inflation risk in the same way as they look at stockmarket risk. 

hotlava

williaa100 said:

I am seriously considering chopping in my SIPP for an annuity now that the IHT rules have changed. Ideally I'd like to do this via a "fee for service" IFA, but I dont want advice on my overall situation, just on the annuity. A couple I have contacted locally arent interested in working on that basis. Anyone know any reputable IFAs who will be happy to advise on an annuity + purchased life annuity without wanting to also manage ISAs etc., please? Thank you.

Before you 'invest' in third party advice, use one of the online tools to give youa feel for what's available/achievable:
E.g. https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/compare-annuities