Annuities - why all the hate?

Cus

My concern about annuities is that the current rate you can get is based on current and future expectations on interest rates, so making a personal judgement is similar to guessing where the market will go.

When interest rates were low a few years ago, it seemed obvious to me that they will go up and the annuity rates then looked very low so looked a poor deal. This happened. But the market at that time thought that it may stay low for many years, hence the rates offered then.  However interest rates rose more than perhaps the market thought.

Now we have what people are thinking are attractive rates to buy an annuity but what worries me is that whose to say that rates won't get higher and higher and last for many many years and we look back and think how today's annuity rates were 'poor'.  

To compare current rates against some so called SWR, or to ignore any predicted correlation between current interest rates and equity market growth in the future might be naive.
You could take a 5% annuity rates now, think you've got a great deal, and then interest rates increase and increase an you are left with an underperforming product.

Its not straightforward 

kermchem

snowlaser said:

I think my plan is logical ... I don't want to be managing assets when I'm 80-90 but I will want an income.  I do not trust that the State Pension will exist in 40 years' time for people like me who have lots of their own savings, so the idea of putting it all in drawdown and being reliant on the State as a backup does not seem safe to me.

This is probably the first recent thread I have seen where the OP says this. I have read threads where exciting drawdown plans are being worked out by a poster aged 55 or 60, with their full mental faculties, and all the ability they will need to manage their investments in retirement as competantly as they did in accummulation.

But.. I worry about that exciting drawdown plan when the retiree gets older, and less willing or able to spend time managing their portfolio. Or, they depart this mortal coil and leave their OH to manage it.

I have a nagging question whether many of the ideas for how to manage a DC pot in retirement are sustainable. I am happy if the drawdown plan includes a potential later life decision to buy an annuity.

QrizB

kermchem said:

But.. I worry about that exciting drawdown plan when the retiree gets older, and less willing or able to spend time managing their portfolio. Or, they depart this mortal coil and leave their OH to manage it.

I have a nagging question whether many of the ideas for how to manage a DC pot in retirement are sustainable. I am happy if the drawdown plan includes a potential later life decision to buy an annuity.

My plan is that, by the time I'm 67, the money will just roll in (DP, SP and [most likely] annuity) without any intervention by me. Then I can relax into my dotage.

(That's also why I'm not planning on buying a yacht with my TFLS - I'd need an extra £150k in my pot to buy the annuity to cover the running costs!)

Fermion

I've been in Drawdown now for 8 years with a large DC pot that has grown by 38% in that time even though I've been drawing 3.7% per annum income. 

I hadn't considered an annuity previously because our plan was to pass our pension pot to our 2 adult children as it was outside the scope of IHT but Rachel Reeves budget and the consultation findings has made us think again. I've recently converted just under 1/3 of my Drawdown pot (£300K) into a level annuity with 100% spouse joint life and 5 year guarantee paying £25,087 per annum. My wife has done the same but with with all of her smaller pot. Not only does this significantly reduce any future IHT liability but it also reduces the impact of future major stock market falls whilst the market is high and annuity rates are good.

I also agree with snowlaser that I don't want the headache of trying to manage the admin of rapidly reducing my drawdown pot when I'm in my 80s. 

Having gone through in detail I can see a lot of Pros and not many Cons

chuffinnora

@Fermion
Sounds like some sensible decisions there to me.

Annuity debate aside, how on earth did you get a joint life policy 100% at £25k for £300k....or have I misunderstood is that only for 5 years? Is that due to age or health conditions?

It sounds like your DC pot has benefitted from the very good run on the markets and record highs, albiet with a covid event in the middle.

Fermion

chuffinnora said:

@Fermion
Sounds like some sensible decisions there to me.

Annuity debate aside, how on earth did you get a joint life policy 100% at £25k for £300k....or have I misunderstood is that only for 5 years? Is that due to age or health conditions?

Both age(I'm 76)  and a few small medical conditions, although we are both reasonably fit for our age - it's for life - the 5 years is the guarantee. 

Bostonerimus1

Cus said:

My concern about annuities is that the current rate you can get is based on current and future expectations on interest rates, so making a personal judgement is similar to guessing where the market will go.

When interest rates were low a few years ago, it seemed obvious to me that they will go up and the annuity rates then looked very low so looked a poor deal. This happened. But the market at that time thought that it may stay low for many years, hence the rates offered then.  However interest rates rose more than perhaps the market thought.

Now we have what people are thinking are attractive rates to buy an annuity but what worries me is that whose to say that rates won't get higher and higher and last for many many years and we look back and think how today's annuity rates were 'poor'.  

To compare current rates against some so called SWR, or to ignore any predicted correlation between current interest rates and equity market growth in the future might be naive.
You could take a 5% annuity rates now, think you've got a great deal, and then interest rates increase and increase an you are left with an underperforming product.

Its not straightforward 

An annuity isn't an investment, it's a longevity insurance policy. You should not buy one thinking about what markets and interest rates might do, you should buy one in conjunction with your retirement income calculations to be one of several streams of money that will allow you to pay your bills. Once the annuity is included in your plan then you can think about risk and markets wrt income/growth generation from your remaining DC pensions and other investments.

OldScientist

Much of the hate arises because, particularly in the US market, there are quite a lot of different types of annuity many of which are somewhat opaque in their function and may not represent good value for money. I note that conventional lifetime annuities (i.e., pay a single premium and get a known amount of income, known as Single Premium Income Annuities or SPIA in the US) are the only ones generally thought of in good light on bogleheads.

Otherwise, as a tool for providing income in retirement, annuities have their advantages and disadvantages compared to the other available tools.

Lifetime RPI annuities. Will provide a known real income for life however long or short with no maintenance required. One disadvantage arises from a short life when the premium is lost from the estate - a problem that can be somewhat mitigated by a guarantee period at the expense of the lower income.

Inflation linked gilt ladder. Will provide a known real income for a known number of years. The income will be somewhat 'lumpy' (dependent on coupons and maturing gilts) so will require some maintenance and there is a possibility of outliving the income. The ladder is also very good at providing cover for gaps in income (e.g., from retirement until state pension age). In the event of an early death, the ladder can be sold although that could be at more or less than the premium.

Constant inflation protected drawdown (so-called 'safe' withdrawal rate, or SWR, approach). Will provide a known real income for an unknown number of years. In 'bad' retirements the retiree might outlive the portfolio and leave no legacy. In 'good' retirements, the amount left at death may be significantly higher, in real terms, than it was at the beginning (whether this is considered an advantage or disadvantage will depend on the retiree).

Percentage of portfolio drawdown. Will provide an unknown and variable income from year to year but the portfolio will never be depleted. The legacy will depend on market conditions during retirement but will be over a narrower range than the SWR approach).

Since the various methods each have their own advantages and disadvantages, a retiree can combine them to diversify the various risks.

OldScientist

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?

Expensive compared to what?

For example, at 65yo, a single life RPI annuity currently had a payout rate of 5.3% (e.g., see https://www.williamburrows.com/calculators/annuity-tables/ ) with the worst 4.8% (so there is competition between the companies)

An inflation linked gilt ladder guaranteed to last a lifetime at 65yo will need to be at least 35 years (taking the retiree to 100yo) with a payout rate of 4.0% (see https://lategenxer.streamlit.app/Gilt_Ladder )

Constant inflation adjusted drawdown to match the annuity (5.3%) or ladder (4.0%) will last an unknown amount of time (historically somewhere between 15 years and upwards of 40 years for the former and 23 years and upwards of 40 years for the latter - future failures are unknown).

JamTomorrow

At current rates Annuities are looking more attractive for me and my Wife and will likely form part of our income in retirement if these rates prevail in 7 years time. 

The main attraction for us is that I do all the financial planning and my Wife has little to no interest.  Therefore if anything happens to me my Wife has been instructed to get a Financial Advisor but having a purchased life annuity in her name will ensure she continues to get a regular annuity income dropping into her bank account monthy before someone is helping her navigate her retreiment planning. 

In addition, as she has been a housewife and has limited pension it could provide good use of her annual allowance prior to state pension as the split from the purchase life annuity between return of capital and income should enable her to fully utilise her personal allowance for 10 years and draw out all her SIPP.