Why buy annuity

Albermarle

Acromion said:

The fact that the DC pension is to be included in the assets liable for inheritance tax ( from April 2027) has suddenly made annuitising significantly more attractive.

For those intending to avoid the double or even triple taxation on the pot - The Telegraph mentions a notional 90% - the option to die with nothing (at least in that element) is clearly desirable.

Just to point out that this 90% is a complete edge case, concocted by the DT to make it sound as bad as possible.

Most people will pay nothing at all. Some will pay obviously but nothing like 90% for the vast majority.

zagfles

Acromion said:

The fact that the DC pension is to be included in the assets liable for inheritance tax ( from April 2027) has suddenly made annuitising significantly more attractive.

For those intending to avoid the double or even triple taxation on the pot - The Telegraph mentions a notional 90% - the option to die with nothing (at least in that element) is clearly desirable.

It's not so much that it's desirable, but that one of the disincentives of annuitising has been seriously diminished.

ISTM that a lot of people avoid annuitising not because they have a positive intention to leave a legacy, but because they feel they'll have been diddled if they end up dying young and the annuity provider "keeping" the money.

Obviously the annuity provider uses the money to cross subside those who live to 100. Just like insurance companies use premiums of those who never claim to subsidise those who do claim. But I don't feel diddled because I've paid for car/house insurance for decades and not claimed anything. That's the point of insurance. And an annuity is basically insurance against longevity. 

zagfles

DullGreyGuy said:

dont_use_vistaprint said:

MK62 said:

People buy annuities for several reasons, but perhaps the most common is for certainty of income......whether it maximises that income is unknown until many years have passed, so that's a judgement you have to make upfront (though maximising income isn't usually a reason for choosing an annuity). Same for "does if beat a drawdown plan" really - maybe, but based on historic data, probably not (but again, not usually the main driver for choosing an annuity).

As for being outdated, they fell out of favour for many years during the era of near zero interest rates, due to the poor payout percentage available......but that's changed somewhat over the last few years, and annuities are making a comeback again. 

As you've said, the downside is handing over a big pile of cash upfront and potentially dying with nothing.......but it doesn't have to be either that or drawdown - it's perfectly viable to use an annuity for part of your income, and drawdown for the other part.

Thank you for this. That makes sense if you need certainty of income.. 

Dying with nothing is actually one of my goals and has been integral to my financial planning and deciding when I retired :-) I’ve never understood people who work far longer than necessary just to leave a ton of cash to the next generation. I’d much rather invest it in them while we are alive and let them make their own money when I’m dead.

Ultimately a lot comes down to your health, wealth and family. 

I think everyone should spend their wealth in their life or leave it to charity but thats just my opinion. The risks of doing that without a guaranteed income is that you end up living vastly longer than you anticipated and so you actually spend it all long before your gone.

Pension freedoms only happened in 2015 so we're only 10 years into people being able to do something other than buy an annuity. The first adopters are likely only in their early to mid 70s so many will have a decade more of life to go yet and some multiple decades. Feels likely there is a sting to come in the future for some who exercised their new freedoms. 

From personal experience my uncle retired in 2015 and had a similar mentality and was burning through his money as his grand parents, parents and all 8 of his brothers died in their late 60s so he assumed he had 5 years or so to go. Family did have words with him after a few year but immediately after he had a health scare so argued back he was doing the right thing and let him enjoy it. Well he's 76 now and living an extremely different lifestyle having gone from near 6 figure income to little more than state pension but still fit and healthy just can't afford to enjoy it. 

I think a bigger risk as pointed out by Martin himself is people being overly cautious and underspending because they're continually worried about stockmarket downturns and "worst case scenarios" and other "what ifs", so they end up living on far less than an IL annuity would buy. 

arthur_fowler

zagfles said:

arthur_fowler said:

zagfles said:

I can't see the point of flat annuities. You just replace investment risk with inflation risk. Even IFAs don't seem to understand this when they waffle on about breakeven points based on guesses about inflation. The point of an annuity isn't to do what maximises lifetime income. Use drawdown for that. The point is to provide a guaranteed income for the rest of your life to pay bills, shopping etc, which will likely increase with inflation, which is unknown just like stockmarket returns. 

Again, it depends......

For us a flat annuity I believe was the correct route to take. Rationale is:
1) We have various DB pensions plus full SPx2 that will kick in over the next 7 years (retiring at 60). These will mitigate (but not remove) inflation risk
2) We want a (relatively) higher income in the next ten years while we are hopefully fit and well enough to travel a lot (which is what we like to do).

1) If private sector DB pensions which usually have caps on inflation increases, that's even more reason to mitigate with something fully inflation protected. A decade like the 1970's would about halve the DB pension value if inflation increases are capped at 5%. Even one off high inflation will permanently dent a DB pension in payment, a single year of 10% as we've seen recently would chop about 5% real value off a DB pension if capped at 5% inflation increase, or 7% if capped at 3%, every year into the future, even if inflation returns to 2% or so.
(It's not so bad in deferment as the cap applies across the entire period of deferment, but once in payment lumpy inflation can serious dent DB pensions)

2) Front loading retirement spend may be sensible but a flat annuity fronts loads by an unknown amount. You can easily front load retirement income to get predictable real income for instance using an IL gilts ladder, or a short term annuity, in addition to a lifetime IL annuity. 

Yes, of course mitigating inflation risk entirely is possible but it is very expensive

DullGreyGuy

zagfles said:

DullGreyGuy said:

dont_use_vistaprint said:

MK62 said:

People buy annuities for several reasons, but perhaps the most common is for certainty of income......whether it maximises that income is unknown until many years have passed, so that's a judgement you have to make upfront (though maximising income isn't usually a reason for choosing an annuity). Same for "does if beat a drawdown plan" really - maybe, but based on historic data, probably not (but again, not usually the main driver for choosing an annuity).

As for being outdated, they fell out of favour for many years during the era of near zero interest rates, due to the poor payout percentage available......but that's changed somewhat over the last few years, and annuities are making a comeback again. 

As you've said, the downside is handing over a big pile of cash upfront and potentially dying with nothing.......but it doesn't have to be either that or drawdown - it's perfectly viable to use an annuity for part of your income, and drawdown for the other part.

Thank you for this. That makes sense if you need certainty of income.. 

Dying with nothing is actually one of my goals and has been integral to my financial planning and deciding when I retired :-) I’ve never understood people who work far longer than necessary just to leave a ton of cash to the next generation. I’d much rather invest it in them while we are alive and let them make their own money when I’m dead.

Ultimately a lot comes down to your health, wealth and family. 

I think everyone should spend their wealth in their life or leave it to charity but thats just my opinion. The risks of doing that without a guaranteed income is that you end up living vastly longer than you anticipated and so you actually spend it all long before your gone.

Pension freedoms only happened in 2015 so we're only 10 years into people being able to do something other than buy an annuity. The first adopters are likely only in their early to mid 70s so many will have a decade more of life to go yet and some multiple decades. Feels likely there is a sting to come in the future for some who exercised their new freedoms. 

From personal experience my uncle retired in 2015 and had a similar mentality and was burning through his money as his grand parents, parents and all 8 of his brothers died in their late 60s so he assumed he had 5 years or so to go. Family did have words with him after a few year but immediately after he had a health scare so argued back he was doing the right thing and let him enjoy it. Well he's 76 now and living an extremely different lifestyle having gone from near 6 figure income to little more than state pension but still fit and healthy just can't afford to enjoy it. 

I think a bigger risk as pointed out by Martin himself is people being overly cautious and underspending because they're continually worried about stockmarket downturns and "worst case scenarios" and other "what ifs", so they end up living on far less than an IL annuity would buy. 

It could go either way, and it may change mid process, spend too much initially, get worried and then swing too far in the other direction. Given the OPs statement that they want to spend it all I somewhat assumed the overspend was a bigger risk for them.

zagfles

arthur_fowler said:

zagfles said:

arthur_fowler said:

zagfles said:

I can't see the point of flat annuities. You just replace investment risk with inflation risk. Even IFAs don't seem to understand this when they waffle on about breakeven points based on guesses about inflation. The point of an annuity isn't to do what maximises lifetime income. Use drawdown for that. The point is to provide a guaranteed income for the rest of your life to pay bills, shopping etc, which will likely increase with inflation, which is unknown just like stockmarket returns. 

Again, it depends......

For us a flat annuity I believe was the correct route to take. Rationale is:
1) We have various DB pensions plus full SPx2 that will kick in over the next 7 years (retiring at 60). These will mitigate (but not remove) inflation risk
2) We want a (relatively) higher income in the next ten years while we are hopefully fit and well enough to travel a lot (which is what we like to do).

1) If private sector DB pensions which usually have caps on inflation increases, that's even more reason to mitigate with something fully inflation protected. A decade like the 1970's would about halve the DB pension value if inflation increases are capped at 5%. Even one off high inflation will permanently dent a DB pension in payment, a single year of 10% as we've seen recently would chop about 5% real value off a DB pension if capped at 5% inflation increase, or 7% if capped at 3%, every year into the future, even if inflation returns to 2% or so.
(It's not so bad in deferment as the cap applies across the entire period of deferment, but once in payment lumpy inflation can serious dent DB pensions)

2) Front loading retirement spend may be sensible but a flat annuity fronts loads by an unknown amount. You can easily front load retirement income to get predictable real income for instance using an IL gilts ladder, or a short term annuity, in addition to a lifetime IL annuity. 

Yes, of course mitigating inflation risk entirely is possible but it is very expensive

It was expensive a few years ago, now it's not expensive at all. Yields on IL gilts are positive which means you can guarantee real terms capital preservation with IL gilts held to maturity, and as a result IL annuities should pay you around the cost divided by your life expectancy. 

FIREDreamer

Albermarle said:

Cairnpapple said:

Having become disabled in my 40s, I'm seeing buying an annuity as a similar action to downsizing to one level and getting an accessible bathroom (all of which I plan to do on retirement). Simplify life, get organised before things get worse. Doing financial tasks with massive brain fog is really miserable. 

We have no kids so die with zero is fine.

As you say one of the advantages of an annuity is to avoid having to think about it, like you do with drawdown. With the latter you have to monitor investments, withdrawal % etc .Or you pay an IFA to do it.
This would apply to everybody who does not like dealing with money issues, whether they are disabled or not.

How often do the companies check you are still alive outwith any guarantee period? - and do you need the hassle of a doctor to confirm this, which would be rubbish with our gp surgery given how long the insurer (and I) had to wait for them to provide medical details at the start of the annuity process (4 months).

DullGreyGuy

FIREDreamer said:

Albermarle said:

Cairnpapple said:

Having become disabled in my 40s, I'm seeing buying an annuity as a similar action to downsizing to one level and getting an accessible bathroom (all of which I plan to do on retirement). Simplify life, get organised before things get worse. Doing financial tasks with massive brain fog is really miserable. 

We have no kids so die with zero is fine.

As you say one of the advantages of an annuity is to avoid having to think about it, like you do with drawdown. With the latter you have to monitor investments, withdrawal % etc .Or you pay an IFA to do it.
This would apply to everybody who does not like dealing with money issues, whether they are disabled or not.

How often do the companies check you are still alive outwith any guarantee period? - and do you need the hassle of a doctor to confirm this, which would be rubbish with our gp surgery given how long the insurer (and I) had to wait for them to provide medical details at the start of the annuity process (4 months).

Depends where you live and your age. 

In my annuity days I think it started at 80 and was every 2 years for those in the UK and 75 but every year for those overseas. It was simply a letter that you had to sign and send back. Some other providers require the signature to be witnessed in a similar way to a passport photo. If its not received back within 2 months we would stop payments as that was always the best ways to get people to call. 

We were subscribed to a service which basically notified us of every death registered in the UK and would record match. If we got a hit the proof of life process was triggered

SmokeysTravels

Many companies won’t ask you at all unless you live or move abroad, or get beyond a certain age (for example, age 90). They will rely on screening the UK list of deaths. For those living overseas it’s likely to be every three years. Over 90 (or any other age they pick) likely to be annually. 

You will need to sign their form and get someone you know (but not a relative) to witness your signature.

Sarahspangles

If I was asked I’d be very tempted to send them a facsimile of Granny Weatherwax’s famous sign I ATE’NT DEAD

GNU Terry Pratchett