Annuities - why all the hate?

DRS1

You may want to approach it from the other direction.

First decide what your essential spending is going to be (add in any regular luxuries you like so you have a basic income you are comfortable with) and then see how much it would cost to get an index linked annuity paying that much per annum.  Maybe that is 50% of the pot maybe it is 20%.

dunstonh

However, when I have floated this on any internet forums I get howls of derision that handing over money to an annuity provider is a bad idea 

The internet is full of stupid people with preconceived ideas.   They lack the ability to analyse things critically.

This forum is mostly more grown-up than others.

something I could understand when interest rates were 0.1% but not now they are back to more normal levels (of course, in 10 years they could be different to today!)

and you are you using logic and reason.

Also - does anyone know if DC pension schemes do let you use your money 50:50 annuity/drawdown like this?

Yes.

 I have asked my own scheme twice and got generic non-answers like "you should seek financial advice at retirement".

They are not authorised to give advice.  The staff members are disciplined if they try and firms can face regulatory action if they act outside of their authorisations.

JamesRobinson48

I'll admit to having a visceral suspicion of annuities, although I don't rule them out completely in my case. But I'd need an annuity salesman to give me straight answers to some direct questions.

Somehow or other, the company providing the annuity must skim off money to pay its overheads, sales force and earn a commercial profit on the level of capital it needs to hold to cover financial and operational risks - for decades into the future. Indirectly, surely the annuitants collectively must bear the cost of all that, otherwise there would be no providers.

You may say all the above is typical of long term insurance policies more broadly. Granted. But having worked in the industry myself, I've seen what large salaries and bonuses practitioners normally have, and how little about these policies' profit margins is publicly disclosed.

It's also unclear to me who or what stands behind the annuity payments in the unlikely event that the provider becomes insolvent. 

On the whole I'd rather buy a gilts ladder DIY. The pricing is transparent, returns are locked in, there are fewer intermediaries to pay off, and HM Treasury stands behind the contractual payments. Oh, and I'm quite likely to leave something behind for my heirs. Although it's true, if I'm still living aged 105, I might have done better with an annuity.

snowlaser

dunstonh said:

 I have asked my own scheme twice and got generic non-answers like "you should seek financial advice at retirement".

They are not authorised to give advice.  The staff members are disciplined if they try and firms can face regulatory action if they act outside of their authorisations.

I understand they can't give advice, but I have literally twice asked "is it POSSIBLE (not ADVISABLE) to do 50:50 annuity:drawdown" and just been told to seek advice.

QrizB

JamesRobinson48 said:

.On the whole I'd rather buy a gilts ladder DIY.  ... Although it's true, if I'm still living aged 105, I might have done better with an annuity.

A few people on the forum have priced DIY gilts ladders recently and (compared to a similar income from an annuity) they've generally run out of money in their late 80s.

Which is average life expectancy for a retiree, but is inconvenient if you're in the 50% who live longer.

So I guess the question is, "do you feel (un)lucky?" and expect to predecease your ladder?

MyRealNameToo

JamesRobinson48 said:

I'll admit to having a visceral suspicion of annuities, although I don't rule them out completely in my case. But I'd need an annuity salesman to give me straight answers to some direct questions.

Somehow or other, the company providing the annuity must skim off money to pay its overheads, sales force and earn a commercial profit on the level of capital it needs to hold to cover financial and operational risks - for decades into the future. Indirectly, surely the annuitants collectively must bear the cost of all that, otherwise there would be no providers.

You may say all the above is typical of long term insurance policies more broadly. Granted. But having worked in the industry myself, I've seen what large salaries and bonuses practitioners normally have, and how little about these policies' profit margins is publicly disclosed.

It's also unclear to me who or what stands behind the annuity payments in the unlikely event that the provider becomes insolvent. 

On the whole I'd rather buy a gilts ladder DIY. The pricing is transparent, returns are locked in, there are fewer intermediaries to pay off, and HM Treasury stands behind the contractual payments. Oh, and I'm quite likely to leave something behind for my heirs. Although it's true, if I'm still living aged 105, I might have done better with an annuity.

When calculating the rate they include an annual administration fee which includes a margin. It is however very much a numbers game and the per year fee per policy is very modest. 

Obviously the a large proportion of profits emerges from investment returns, for long term insurance these are much more significant than general insurance which tends to be short tail and so needs to be highly liquid funds with a good amount in nothing more than basic money market funds. 

There is also the difference between expected longevity and experienced longevity. How much prudence is built into their longevity risk models. Add to that in recent years we've had pandemics, austerity, cost of living crisis etc all of while have helped annuity providers books. Obviously you need to look at the book as a whole though as many in the annuity space are also in the life space and those events have had the opposite effect there... the two diversify well in capital modelling for obvious reasons. Were we to have a realistic disaster scenario come into play in annuities (eg a cure for cancer) their fortunes could turn quickly. 

The FSCS stands being annuity payments in the same way as it does all insurance. To date no annuity insurer has actually failed. 

snowlaser said:

dunstonh said:

 I have asked my own scheme twice and got generic non-answers like "you should seek financial advice at retirement".

They are not authorised to give advice.  The staff members are disciplined if they try and firms can face regulatory action if they act outside of their authorisations.

I understand they can't give advice, but I have literally twice asked "is it POSSIBLE (not ADVISABLE) to do 50:50 annuity:drawdown" and just been told to seek advice.

Your forgetting how tight people are on "giving advice"... I recall a guy getting a final gross misconduct warning when he worked on the Motor Insurance Quote line because a customer called up saying he'd come into money and wanted to lease a ferrari 612 as his dream car for a couple of years but wanted to know how much the insurance would be before he does. The Agent said "nice car" and Compliance deemed he'd given professional advice because he worked in Motor insurance. 

Thankfully HR was told to remove the warning because the MD decided it was a statement of fact not a piece of professional advice but when you can be frog marched out the building for a relatively minor comment you can understand why agents are so cautious in what they say. 

gm0

The answer to your question on 50:50 is "it depends".   Yes you can.  Can you with your current provider - maybe yes - maybe no.  Not everything that is legally allowed is offered by all products old and new.  So you may need to move some or all of your benefits to organise what happens where.  Same thing for drawdown. Some of us consolidate our pots into one.  Some do that and then put different parts with different platforms for investment choice or other reasons.

So you might have to move your pension benefits to make it happen 50:50.  Old provider isn't going to discuss options not supported by that scheme with you.  Because that's the kind of advice they are NOT ALLOWED to give.  They will repeat the list of things they do offer. And one of those will be full transfer out.  You will need to check about partial transfers.  By now - many do.  But could not predict definitively.

Partial transfer (if supported) allows you to move the required amount in one step.

Where you buy the annuity affects price - a default existing scheme offer may not be best.  Forum wisdom in general is to shop around and to use the indirect market (IFA) transactionally.  Especially if there are impaired health conditions to build into properly assessed quotes

Full transfer (always supported but subject to the safeguarded benefits over 30k advice rule - for GAR etc.  Most can just move simply by asking new provider to pull the account.

Annuities are now offered with longer guarantee periods which undermines the death pooling.  Early deaths lose out to fund the extreme old age (past actuarial average) of others.  It cannot be otherwise.  But increasing the "short run" guarantee - undermines the rate offered.  There is no free lunch.  And yes.  Life companies make a turn on it.

Counterparty risk exists.  But there is regulation on capital requirements and liabilities.  In general life companies with an annuity pool are not sticking the money to pay the cashflow on red at the casino. Regulator takes a dim view.  There are always soverign default and other scenarios where you can create a crisis.  As Truss did briefly with some DB schemes and their liability matched and alternatively invested components.

The bigger risk with annuities - is indexation.  If you refer back to the 1970s.  People with fixed income.  Unindexed annuties were destroyed in income value by sustained high inflation years over a quarter - perhaps the first quarter of their retirement.  People with capped indexation - were also impacted but slightly less.  Uncapped RPI indexation - less so again.  Of course the rate you can get with a fat indexation promise - is - naturally - a lot lower upfront.  So you may obtain good protection and value late in retirement.  But be shorter of cashflow when you might enjoy it more - early in retirement. Depending on the size of the pot.

Cobbler_tone

MyRealNameToo said:

JamesRobinson48 said:

I'll admit to having a visceral suspicion of annuities, although I don't rule them out completely in my case. But I'd need an annuity salesman to give me straight answers to some direct questions.

Somehow or other, the company providing the annuity must skim off money to pay its overheads, sales force and earn a commercial profit on the level of capital it needs to hold to cover financial and operational risks - for decades into the future. Indirectly, surely the annuitants collectively must bear the cost of all that, otherwise there would be no providers.

You may say all the above is typical of long term insurance policies more broadly. Granted. But having worked in the industry myself, I've seen what large salaries and bonuses practitioners normally have, and how little about these policies' profit margins is publicly disclosed.

It's also unclear to me who or what stands behind the annuity payments in the unlikely event that the provider becomes insolvent. 

On the whole I'd rather buy a gilts ladder DIY. The pricing is transparent, returns are locked in, there are fewer intermediaries to pay off, and HM Treasury stands behind the contractual payments. Oh, and I'm quite likely to leave something behind for my heirs. Although it's true, if I'm still living aged 105, I might have done better with an annuity.

When calculating the rate they include an annual administration fee which includes a margin. It is however very much a numbers game and the per year fee per policy is very modest. 

Obviously the a large proportion of profits emerges from investment returns, for long term insurance these are much more significant than general insurance which tends to be short tail and so needs to be highly liquid funds with a good amount in nothing more than basic money market funds. 

There is also the difference between expected longevity and experienced longevity. How much prudence is built into their longevity risk models. Add to that in recent years we've had pandemics, austerity, cost of living crisis etc all of while have helped annuity providers books. Obviously you need to look at the book as a whole though as many in the annuity space are also in the life space and those events have had the opposite effect there... the two diversify well in capital modelling for obvious reasons. Were we to have a realistic disaster scenario come into play in annuities (eg a cure for cancer) their fortunes could turn quickly. 

The FSCS stands being annuity payments in the same way as it does all insurance. To date no annuity insurer has actually failed. 

snowlaser said:

dunstonh said:

 I have asked my own scheme twice and got generic non-answers like "you should seek financial advice at retirement".

They are not authorised to give advice.  The staff members are disciplined if they try and firms can face regulatory action if they act outside of their authorisations.

I understand they can't give advice, but I have literally twice asked "is it POSSIBLE (not ADVISABLE) to do 50:50 annuity:drawdown" and just been told to seek advice.

Your forgetting how tight people are on "giving advice"... I recall a guy getting a final gross misconduct warning when he worked on the Motor Insurance Quote line because a customer called up saying he'd come into money and wanted to lease a ferrari 612 as his dream car for a couple of years but wanted to know how much the insurance would be before he does. The Agent said "nice car" and Compliance deemed he'd given professional advice because he worked in Motor insurance. 

Thankfully HR was told to remove the warning because the MD decided it was a statement of fact not a piece of professional advice but when you can be frog marched out the building for a relatively minor comment you can understand why agents are so cautious in what they say. 

A bit off piste but what you are alluding is extremely harsh and misguided. Would have been a good ER case if they had dismissed him. From what you stated I am assuming it went to appeal and the MD overruled it, probably after some legal advice! You would have hoped the disciplining manager had taken some counsel ahead of the hearing.
HR wouldn't be removing warnings on the word of anyone but god knows what goes on at some dodgy companies.

The essence is right though. Any professional organisation not in the business of giving financial advice are usually very careful with their words.

gm0

My take is that the hate is a sometimes family inherited folk memory of the period when you were *forced* to buy one but rates were falling and falling.  Seemingly never bouncing back up.  Due to central bank rate factors in the falling interest rates into 2008 GFC into QE and then covid period.

The income seemed sparse for the capital given up.  People are terrible at arithmetic and don't value indexed guaranteed income with no investment risk attached.  So the complaining was partly justified (compulsion - pre pension freedoms).  And partly arising from poor numeracy.

Bostonerimus1

There is a widespread conviction in the US that annuities are universally bad and you might be hearing American voices on those forums.

Annuities and DC drawdown are very different approaches to generating retirement income and so a combination of them offers diversity and can produce a very robust solution. But you need to consider your financial position holistically and come up with an appropriate set of income solutions and that might, or might not, include an annuity. For example I have a DB pension and SP to come so I have plenty of index linked "guaranteed" income and so won't be buying an annuity.