Why buy annuity

kinger101

Cobbler_tone said:

In real terms how much does inflation matter to a large percentage of the older generation?

In many instances....no mortgage, no car, no fancy holidays. 
The cost of heating their home and cost of smoked salmon in M&S is probably the key driver for many.
Not forgetting that if inflation is high, so are saving rates. My parents and partners parents are both working class retirees with more money than they have ever had.

Recognising of course that for those renting and potentially living on the limit that it really matters.
If you are going to invest in high risk stuff, then you are always more likely to come a cropper. Hence why the older folk often stick to a good old bank account and cash in envelopes! I know my dad still draws £250 cash (state pension) every Monday and hands my mum 'housekeeping' and stuffs the rest in a bill envelope!  It works for them.

Well, when the inflation is triggered by a spike in gas prices, I think you've answered your own question.  It's not safe to assume blank cheque governments can solve (ie  kick the can down the road) every crisis.

Cobbler_tone

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.

zagfles

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? 

zagfles

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. 

westv

I read reports several months ago that annuity rates might fall back but I see they actually went up slightly - maybe they have now fallen back?

Cobbler_tone

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. 

It is always fun to compare previous generations to current and future ones…but it is impossible.

My parents had one mortgage for £1,000. They earned £9 a week and bought their subsequent house with cash. We never went abroad. They never had smart phones and £3.50 coffees. They smoked and rented the TV. We got a landline in the mid-70’s and fizzy pop was delivered on a lorry.
A friend of mine was the first to get a VHS player for about £700 (he owed a video rental store) and my biggest ever gift was an early CD player.
A lot of that generation were lucky enough to have ‘a job for life’. They bought items from a catalogue over 20 weeks.
They didn’t go out for dinner and fish & chips was our treat…well that costs a bomb nowadays!
I think consumer choice is the key driver why so many people struggle these days. Their kids £100 trainers and £40 a month on iPhones, to go with the PS5 and latest tablet PC.

Thankfully most people have been priced out of smoking!

arthur_fowler

westv said:

I read reports several months ago that annuity rates might fall back but I see they actually went up slightly - maybe they have now fallen back?

One of the reasons I purchased an annuity recently rather than waiting until I retire next year was because it was looking like rates were on the way down. Between me starting and completing the application, the quote expired due to the slowness of my pension provider. I thought it was going to be bad news but actually the rate had gone up (thankfully).

OldScientist

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.

OldScientist

Cobbler_tone said:

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. 

It is always fun to compare previous generations to current and future ones…but it is impossible.

They didn’t go out for dinner and fish & chips was our treat…well that costs a bomb nowadays!
I think consumer choice is the key driver why so many people struggle these days. Their kids £100 trainers and £40 a month on iPhones, to go with the PS5 and latest tablet PC.

Thankfully most people have been priced out of smoking!

Way OT, but I suspect it is house prices and rents (with much less in the way of council housing as an alternative to the private sector) compared to salary that has had the largest impact on budgets over the last 50 or more years. For working people, the high inflation of the 70s was OK since wages largely kept up but it had a significant effect on those living off their assets (at least until the 80s). Over the last decade, the opposite has largely been the case, wages have not kept up with inflation, but asset values have.

Thanks to the removal of credit restrictions, a lot of major purchases in the 60s and 70s were made on the never never, so monthly outgoings are not a new thing! I'd suggest that a mobile is now pretty well essential and not the luxury that it once was (although to be fair, there are cheaper models than the iphone).

Moonwolf

Cobbler_tone said:

They didn’t go out for dinner and fish & chips was our treat…well that costs a bomb nowadays!

I was born in the mid 60s.

As part of a divorced family we went out quite a lot with grandparents and the other parent.  This included Little Chef, Kardomah, Bernie Inn etc.  

Admittedly. holidays weren't abroad, usually we went to stay with family friends who lived on the coast.  My grandfather had a boss at work who had a cottage in Wales we used to go to off season, no idea what, if anything was paid.

We bought our first house 36 years ago and our mortgage rate was 15% which is fine when you have budgeted for it although it made us cautious and one of the reasons we didn't ramp-up is I always worried about rates jumping again.  Someone recently who's fixed rate at 2% ran out and had to take 6% must have found it difficult.