Annuity like investments from pension

Cus

SVaz said:

£215k for 30 years index linked £10k annual income starting 2030. 

I guess you have to pay a premium over the equivalent annuity for the ability to retain capital when they mature.

I'm surprised that there are not nicely packaged annuity like products for SIPPs designed to exactly replicate the actions of moving to a real annuity at 55. Maybe because you can't legally promise to buy the actual follow on annuity at age 55 from the SIPP when you are younger.

DullGreyGuy

Cus said:

SVaz said:

£215k for 30 years index linked £10k annual income starting 2030. 

I guess you have to pay a premium over the equivalent annuity for the ability to retain capital when they mature.

I'm surprised that there are not nicely packaged annuity like products for SIPPs designed to exactly replicate the actions of moving to a real annuity at 55. Maybe because you can't legally promise to buy the actual follow on annuity at age 55 from the SIPP when you are younger.

So you are trying to lock into it for life now? Or just something until you are 55 at which point you can buy an annuity? 

Annuities work because of the concept of the common pool, they can payout to people that live 30 years beyond their life expectancy because they have the surplus funds from all those that died 10 years before their time. As an insurance product they must also hold capital above and beyond their best estimate of liabilities. 

There are also fairly good diversification benefits either because you write both Life and Annuities or you buy reinsurance from other companies with big life books. There is a strong inverse correlation between mortality and longevity risk so when your annuity book is doing badly (people are living longer) then your life book is doing well (people arent dying)

Cus

DullGreyGuy said:

Cus said:

SVaz said:

£215k for 30 years index linked £10k annual income starting 2030. 

I guess you have to pay a premium over the equivalent annuity for the ability to retain capital when they mature.

I'm surprised that there are not nicely packaged annuity like products for SIPPs designed to exactly replicate the actions of moving to a real annuity at 55. Maybe because you can't legally promise to buy the actual follow on annuity at age 55 from the SIPP when you are younger.

So you are trying to lock into it for life now? Or just something until you are 55 at which point you can buy an annuity? 

Annuities work because of the concept of the common pool, they can payout to people that live 30 years beyond their life expectancy because they have the surplus funds from all those that died 10 years before their time. As an insurance product they must also hold capital above and beyond their best estimate of liabilities.

Assuming one thought rates were high and will reduce over the long term, it's to lock in that high rate now, with the commitment that at the future age of 55 the ring fenced SIPP funds will automatically purchase or roll into an annuity at todays rates, as if they changed the rules and allowed someone to be able to buy an annuity today from SIPP funds when younger than 55.

DullGreyGuy

In principle they could change the rules such that you could buy a deferred annuity now and still effect the control as to the point you start receiving funds but I doubt its even on the political priority list right now let alone at the top of it. 

Cus

DullGreyGuy said:

In principle they could change the rules such that you could buy a deferred annuity now and still effect the control as to the point you start receiving funds but I doubt its even on the political priority list right now let alone at the top of it. 

True, hence I was trying to see what could replicate that as closely as possible today 

DullGreyGuy

Cus said:

DullGreyGuy said:

In principle they could change the rules such that you could buy a deferred annuity now and still effect the control as to the point you start receiving funds but I doubt its even on the political priority list right now let alone at the top of it. 

True, hence I was trying to see what could replicate that as closely as possible today 

Is that the Q though? Isnt it what can you do now that would grow your fund if the gilt rates tank accepting the fund would fall if rates continued to rise thus effectively pegging you to be able to buy something equivalent to what you could now (at least from an investment risk perspective)

OldScientist

TheGreenFrog said:

OldScientist said:

If you mean the more complex approach, yes the duration of the gilt and annuity 'constantly' have to be matched so that at purchase, the gilt would have a maturity date in the future (in other words, every so often, the gilt would have to be sold and a new one purchased). UK mortality stats (both general and those used by insurance companies) are available although annuity durations can also be tracked by measuring how payout rates change with changes in yields.

I agree, that mortality assumptions can change (although this will usually be gradual) and that low coupons would make life easier.

This is the bit I don't understand.  If I am 55 and mortality on annuity is at 88, why not just buy now a gilt maturing in 2058?  

Sorry, my earlier post does contain some unnecessarily complicated approaches (I was in the middle of doing some comparisons between various methods using historical data and this was one approach I was considering).

Yes, buying a single gilt maturing after the sum of the deferral period and the duration (or weighted maturity) of the annuity will remove some/most interest rate risk (but not all of it, because changes in yields can be different at different maturities).

The duration of the annuity is not equal to the life expectancy and will usually be less - it depends on both mortality rates (increases in longevity will lead to increases in duration) and yields (increases in yields will lead to decreases in duration). For example, on a quick calculation using ONS mortality rates and a flat yield curve, the weighted maturity for an annuity purchased at 65yo is about 14 years for a real yield of -2%, 12 years for a real yield of 0%, and 11 years for a real yield of 2%.

This means that as yields change with time, the duration matching between the gilt and the annuity will also change.

OldScientist

Cus said:

SVaz said:

£215k for 30 years index linked £10k annual income starting 2030. 

I guess you have to pay a premium over the equivalent annuity for the ability to retain capital when they mature.

I'm surprised that there are not nicely packaged annuity like products for SIPPs designed to exactly replicate the actions of moving to a real annuity at 55. Maybe because you can't legally promise to buy the actual follow on annuity at age 55 from the SIPP when you are younger.

A deferred income annuity (DIA) would be something like that (in other words, pay a premium now and only receive income after a deferral period) - my understanding is that they are not currently available in the UK (although they are in the US).

FIREDreamer

OldScientist said:

Cus said:

SVaz said:

£215k for 30 years index linked £10k annual income starting 2030. 

I guess you have to pay a premium over the equivalent annuity for the ability to retain capital when they mature.

I'm surprised that there are not nicely packaged annuity like products for SIPPs designed to exactly replicate the actions of moving to a real annuity at 55. Maybe because you can't legally promise to buy the actual follow on annuity at age 55 from the SIPP when you are younger.

A deferred income annuity (DIA) would be something like that (in other words, pay a premium now and only receive income after a deferral period) - my understanding is that they are not currently available in the UK (although they are in the US).

I have seen some old conventional pensions contracts sold by insurance companies (non profit or with profits, as opposed to unit linked) from the 1980’s and earlier which did promise an annuity from their maturity date. They ceased to be sold from the late 1980’s when companies started to flog unit linked pensions with no guarantees. The reserving costs for the latter were much less onerous for the insurers.