Annuities - why all the hate?

badmemory

I was going to put my small DC into drawdown, until I rmembered that my mother died of dementia, so I bought an annuity instead.

artyboy

badmemory said:

I was going to put my small DC into drawdown, until I rmembered that my mother died of dementia, so I bought an annuity instead.

Wouldn't affect my choices... drawdown still works if there is a PoA in place for someone trusted to step in if you can't manage the fund yourself.

kinger101

Not sure which forums you're on.  Many on here currently see them as a viable option at present.  I know if I were retiring today, I'd be giving serious consideration  to using at least some of my DC pot to purchase an index linked annuity serious consideration.

But I'm not retiring today and I don't know what the market for annuities will be like when I do.  I'd not make plans yet for what I might or not buy in over 10 years.

Moonwolf

I think the dislike comes in part from things that used to be true and in part about perception.

- It wasn’t that long ago that rates were quite poor, it was possible to drawdown an income almost the same as an annuity and still theoretically have the capital left,
- We have had a fairly long period of low interest rates and good stock market performance, many people have benefited and credit their own investment expertise over the luck of being in the right place at the right time, they think these benign conditions or their “investment genius” will continue indefinitely.
- Buying an annuity means that you have “spent” the money and can’t leave it to your kids, people had got into the mindset that a pension is a vehicle to avoid IHT rather than provide for their own old age.
- People under-estimate how long they might live and they worry about spending tens or hundreds of thousands on an annuity and the dying the day afterwards.
- It does close off your options, basically, once you have bought an annuity you can’t change it.

but…

- Today rates are better, most people in their 60s should be able to get 5%, you can’t draw down 5% for ever and be confident your money will last.
- On this forum in particular, the regulars are realistic about investment performance and know stocks can go down, and it could be tomorrow or the day after you retire.  This makes relying on DC pot growth more risky than some people allow for.
- The IHT exemption for pots is being closed, while personally I wouldn’t recommend changing plans because of the new rules, until the new rules are clear, many are, and the more that are sold, again the better rates are.
- Again, on this forum, most people are aware that a 65 year old man on average will live to 85, has a 1 in 4 chance of making 92 and a 1 in 10 chance of making 96. While it is true that you might die the day after taking out the annuity, you are more likely to live to 96, unless you know about an illness, and you would be dead anyway and not had the benefit of the money anyway.  Those few that do die early help subsidise those that live to 96 and help make sure they don’t run out of money.
- Although you can’t change your annuity decision, you have already bought security you can relax.

Overall, the conclusion is you should always look into your options and keep up to date, don’t assume something that was previously bad still is.  My plans have always been fluid and I have changed them over time. I have even changed my plan in the 6 months since I have been retired. 

Also your own attitude to risk, I value having a bit more than enough and knowing I won’t run out over having even more.

MetaPhysical

Annuities are an expensive comfort blanket.  However, they have a place for some people and I can see their attraction in some cases.  However, I still maintain they are an [expensive] comfort blanket.

Think of it in a different way and ask yourself this question:  You hand over your pot in exchange for the annuity.  Cool, so why would the annuity provider actively compete with other companies in the hope you give your pot to them?  Because they can make a handsome return and profit on that money whilst still giving you some of it back as your annuity payments.  They will invest it - just like you could do.  If they as a business want your money to invest, then with some knowledge and understanding it must be an almost certain bet (otherwise they wouldn't do it) , and they will want a return of at least 5-10% on top of giving you your payments.  So why not cut out the middle man - the annuity provider - out and invest it yourself and keep all of the returns?

QrizB

MetaPhysical said:

So why not cut out the middle man - the annuity provider - out and invest it yourself and keep all of the returns?

For all the reasons that have already been discussed on this thread, and others before it, and no doubt on threads yet to come?

MetaPhysical

QrizB said:

MetaPhysical said:

So why not cut out the middle man - the annuity provider - out and invest it yourself and keep all of the returns?

For all the reasons that have already been discussed on this thread, and others before it, and no doubt on threads yet to come?

Yep, absolutely.

Secret2ndAccount

MetaPhysical said:

... They will invest it - just like you could do.  If they as a business want your money to invest, then with some knowledge and understanding it must be an almost certain bet (otherwise they wouldn't do it) , and they will want a return of at least 5-10% on top of giving you your payments.  So why not cut out the middle man - the annuity provider - out and invest it yourself and keep all of the returns?

They will price the annuity for, say, a 20 year payout. You keep the money yourself, plus the 10% the insurance company would have kept. So, to a first approximation, you can pay yourself for 22 years. What happens if you live 25 years?

Linton

MetaPhysical said:

Annuities are an expensive comfort blanket.  However, they have a place for some people and I can see their attraction in some cases.  However, I still maintain they are an [expensive] comfort blanket.

Think of it in a different way and ask yourself this question:  You hand over your pot in exchange for the annuity.  Cool, so why would the annuity provider actively compete with other companies in the hope you give your pot to them?  Because they can make a handsome return and profit on that money whilst still giving you some of it back as your annuity payments.  They will invest it - just like you could do.  If they as a business want your money to invest, then with some knowledge and understanding it must be an almost certain bet (otherwise they wouldn't do it) , and they will want a return of at least 5-10% on top of giving you your payments.  So why not cut out the middle man - the annuity provider - out and invest it yourself and keep all of the returns?

An annuity is absolulutely guaranteed no matter what happens to the stock market and for however long you live..  Your investments are not, unless you invest in a ladder of gilts, possibly index linked. 

If you look on previous threads on this forum you will find that a Safe Withdrawal Rate from investments giving you an inflation linked income until death is normally taken to be 3%-3.5% of initial capital.  The danger is that there is a stock market crash and your drawdowns start to eat into the assets you need to generate future income.

chuffinnora

To add, as an individual you have 1 pot and 1 chance, and may get it wrong.
They have millions or billions and can give those guarantees as in theory their funds never run out.