Annuities - why all the hate?

RogerPensionGuy

Bostonerimus1 said:

MetaPhysical said:

I'm not disagreeing with any of those points folks.  Again, I state that annuities work for many people, especially anyone lacking cognitive capabilities, or even for people who frankly CBA with all this and would just rather hand it over and get an annuity.  Even then though, I'd argue that a good IFA or FP could, for a percentage, operate your drawdown mechanism on your behalf and you'd get more money than an annuity would pay.   As to getting too old to operate drawdown by yourself you can take an annuity at that stage when you're older in a "fire and forget" way.  I think annuities are just so expensive if you want to build in basic indexation.  I concede that I am 58, mathematically minded and able to operate drawdown myself.  Not everyone is.

A drawdown approach is certainly one many people find attractive. However, you need to appreciate that many people cannot afford to take the risk of a 20% or 50% fall in the markets and an IFA won't protect you from that and they will still take their 1% while you are losing money. Your income streams should be diverse and annuities should not be compared with investments because they are insurance. If you have as much optimism about your lifespan as you do in markets then an annuity should be a strong consideration.

Just imagine being heavily dependent on a SIPP in drawdown and unfortunately the markets drop 30 or 40% for a good few years or 5 at the start and inflation is poking hard up. 

But the guy who purchase a sensible annuity RPI or a sensible % index will probably be less interested in a big old dip that lasts longer than we have seen these last few decades. 

I do wonder who will get better sleep. 

Fermion

Albermarle said:

I follow most of the logic behind getting an annuity discussed in this and other posts, but I do not quite follow this onepoint.

Not only does this significantly reduce any future IHT liability 

Although your pension pot will be smaller, you will have an higher monthly/annual income.
If you do not spend it, then it will build up in your estate ( as savings etc) so you will slowly increase any IHT liability, probably at some point to back where you started, or possibly even worse.

If you do spend it, then without an annuity you could have presumably just drawn more income from your DC pot, which would also have reduced your IHT liability.

In reality increased spending and gifting are the key points for reducing IHT liability, not whether you get an annuity or not. It is possible it might help, as there so many different possible circumstances, but from an IHT perspective ( under the new rules in 2027)  you are just shifting money from pension to the rest of your estate.

I take your point regarding additional monthly income, we have been gifting a small amount to our son who is saving to buy a property. We intend to significantly increase our monthly gifts to him. As you are aware regular gifts out of surplus income are outside the scope of IHT. We will update the paperwork once the annuity income arrives as a record of our regular surplus income gifts.

As I mentioned previously, I personally think the admin around continually selling funds to increase drawdown income will be a lot more difficult than just having a slug transferred into an annuity, but other may disagree.

Cus

Bostonerimus1 said:

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.

All fair, my point however was to comment on how a number of people are 'valuing' annuities and the trend seems to be that they think they are 'good value' or 'great time to get one' now.  That assessment of value should be based on needs as you say, it's not good value from a market perspective, it's current fair value.

If one had bought an annuity 7 years ago paying x% for £100k, and today they can get 2x%. If the original product had fair inflation/interest rate linked increases, would you be now receiving 2x%?  I don't know 

OldScientist

MetaPhysical said:

OldScientist said:

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).

People are reading my contribution to the thread thinking I'm saying something along the lines of "don't take an annuity".  I'm not saying that at all and indeed said quite clearly I can see their attraction in some cases and I applaud anyone that feels that this is the best for them.  Good for them and I wish them well.

What I am saying is that with a little research and personal learning development, for example some of the excellent threads on this forum from very knowledgable people and from people like Pete Matthews, James Shack and others via their books and YouTube,  you can keep all the money that the insurance company would have made and keep it for yourself.  I absolutely get that the annuity guarantees you an income and insulates you from the market.  However, that is an expensive security blanket in my opinion when you could have made double the money, maybe more, what the annuity will pay you.

The 'floor and upside' strategy, where sources of guaranteed income (SP, DB pension, RPI annuities and IL gilt ladders) to support core (or 'essential') expenditure (however that is defined) in retirement and variable withdrawals from the residual portfolio support adaptive (or 'discretionary') expenditure has also been long established (e.g., Zwecher, Retirement Portfolios: Theory, Construction, and Management). My previous post gave two possible sources of flooring (annuity and ladder) with current payout rates which each have advantages and disadvantages.

The questions I have for you are, for a 65yo retiring right now with a portfolio consisting of 60% global equities and 40% global bonds,
a) what will the realised safe withdrawal rate be? and
b) with 5.3% inflation adjusted withdrawals (to match the current annuity payout rate) will the portfolio last until death or not?

Bostonerimus1

Albermarle said:

Bostonerimus1 said:

MetaPhysical said:

I'm not disagreeing with any of those points folks.  Again, I state that annuities work for many people, especially anyone lacking cognitive capabilities, or even for people who frankly CBA with all this and would just rather hand it over and get an annuity.  Even then though, I'd argue that a good IFA or FP could, for a percentage, operate your drawdown mechanism on your behalf and you'd get more money than an annuity would pay.   As to getting too old to operate drawdown by yourself you can take an annuity at that stage when you're older in a "fire and forget" way.  I think annuities are just so expensive if you want to build in basic indexation.  I concede that I am 58, mathematically minded and able to operate drawdown myself.  Not everyone is.

A drawdown approach is certainly one many people find attractive. However, you need to appreciate that many people cannot afford to take the risk of a 20% or 50% fall in the markets and an IFA won't protect you from that and they will still take their 1% while you are losing money. Your income streams should be diverse and annuities should not be compared with investments because they are insurance. If you have as much optimism about your lifespan as you do in markets then an annuity should be a strong consideration.

Anybody in a long term drawdown, will see many drops in the market, as part of the normal ups and downs over a 30 year period. So you can afford to take the risk, as it is part of the plan.
Of course a prolonged downturn of say a decade could hurt, as could a 50% drop in the markets, but hopefully in the latter case you would not be invested so aggressively as to take the full brunt.

Yes, the volatility of the markets is baked into the modeling, both good and bad. But negative deviations from the mean by a few standard deviations for a few years or at the wrong time, ie. close to retirement date, can force big changes to a SWR plan that are completely within the modeled outcomes, but often ignored by the optimist in all of us.  As you say you would hopefully not be invested entirely in equities that take the full brunt of a 50% market fall, so that's where annuities can form part of a diverse retirement portfolio....along with bond ladders, cash, real estate etc. etc.

Bostonerimus1

Cus said:

Bostonerimus1 said:

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.

All fair, my point however was to comment on how a number of people are 'valuing' annuities and the trend seems to be that they think they are 'good value' or 'great time to get one' now.  That assessment of value should be based on needs as you say, it's not good value from a market perspective, it's current fair value.

If one had bought an annuity 7 years ago paying x% for £100k, and today they can get 2x%. If the original product had fair inflation/interest rate linked increases, would you be now receiving 2x%?  I don't know 

People just can't get out of the mindset that an annuity is an investment - IT ISN'T! When you buy an annuity you are buying insurance to cover income needs if you live a long time. The cost of that insurance will go up and down, but you don't wait to buy insurance coverage when you need it. Now working out when/if you actually need that insurance is the tricky thing. For me I have a DB and SP so I don't need an annuity and I have almost all of my investments in equity index funds because I want the potential growth and if they lose 50% it won't affect my income.

Cus

I don't disagree.  

I think there were a number of people that may have wanted to buy an annuity years ago for rational reasons like you suggest, but was it true that the lump sum cost of obtaining their required rate was too high?  Are some people now looking at annuity rates and thinking that now, with the same lump sum cost as years ago, they can get the required rate to cover bills?

If all of their lump sum investments ring fenced for a future annuity at that time were in gilts, then due to the low rates at the time, the price of the gilts was much higher, so their lump sum was higher.  If they stuck with those gilt investments but waited to buy an annuity until today, then I assume their ring fenced gilt investments would have a lower cash value, but would earn a higher rate, so net net no difference now or years ago.

I guess the issue is that now a number of people have DC pots based highly in equity instead of said gilts, so by then deciding to now choose an annuity is timing the market

Bostonerimus1

Cus said:

I don't disagree.  

I think there were a number of people that may have wanted to buy an annuity years ago for rational reasons like you suggest, but was it true that the lump sum cost of obtaining their required rate was too high?  Are some people now looking at annuity rates and thinking that now, with the same lump sum cost as years ago, they can get the required rate to cover bills?

If all of their lump sum investments ring fenced for a future annuity at that time were in gilts, then due to the low rates at the time, the price of the gilts was much higher, so their lump sum was higher.  If they stuck with those gilt investments but waited to buy an annuity until today, then I assume their ring fenced gilt investments would have a lower cash value, but would earn a higher rate, so net net no difference now or years ago.

I guess the issue is that now a number of people have DC pots based highly in equity instead of said gilts, so by then deciding to now choose an annuity is timing the market

I agree about the interest rate "swings and roundabouts" of buying an annuity with a gilt and bond allocation. As far as today's high equity values go maybe it's a good time to be taking some money off the table and putting it into a back pocket annuity or at least a bond ladder. Plan for the worst and hope for the best.

Albermarle

Fermion said:

Albermarle said:

I follow most of the logic behind getting an annuity discussed in this and other posts, but I do not quite follow this onepoint.

Not only does this significantly reduce any future IHT liability 

Although your pension pot will be smaller, you will have an higher monthly/annual income.
If you do not spend it, then it will build up in your estate ( as savings etc) so you will slowly increase any IHT liability, probably at some point to back where you started, or possibly even worse.

If you do spend it, then without an annuity you could have presumably just drawn more income from your DC pot, which would also have reduced your IHT liability.

In reality increased spending and gifting are the key points for reducing IHT liability, not whether you get an annuity or not. It is possible it might help, as there so many different possible circumstances, but from an IHT perspective ( under the new rules in 2027)  you are just shifting money from pension to the rest of your estate.

I take your point regarding additional monthly income, we have been gifting a small amount to our son who is saving to buy a property. We intend to significantly increase our monthly gifts to him. As you are aware regular gifts out of surplus income are outside the scope of IHT. We will update the paperwork once the annuity income arrives as a record of our regular surplus income gifts.

As I mentioned previously, I personally think the admin around continually selling funds to increase drawdown income will be a lot more difficult than just having a slug transferred into an annuity, but other may disagree.

Yes the gifting out of income point is valid. Easier to convince HMRC that it was all OK, when comes of a regular monthly payment, rather than an intermittent drawdown.

On the other point, with a modern pension, with a good website ( or with an IFA), I would not consider the admin particularly onerous.

MarzipanCrumble

I have a SIPP (approx 250k untouched) and am 74;  I have a higher tax income from my DB and widow pensions, one of which is an annuity bought 2009 by husband, 50% spouse survial income (me) and 4% inflation rise pa.   Very, very grateful for that.  It pays roughly 9k pa now.  Originally it paid about 11k pa until OH died 2011. 

So..... I am thinking of converting my SIPP to an annuity.  I am way into IHT territory.  I would gift (surplus to income) the proceeds to my offspring.  I keep records already proving I have surplus to income capacity.

I am really not interested in the stress or research to maximise a SIPP via drawdown and checking its subsequent growth.

I really see this as a solution to bringing SIPPs into IHT territory in that if I need the income I can stop giving to offspring.