Locking In Annuity Rates?

DRS1

So a layman's conclusion from that is that you can't adopt a buy and forget policy.  You would have to keep tweaking for things like getting older and changes in yield.  Is that right?

I may be wrong but I think people looking to lock in today's annuity rates are thinking of a buy and forget approach.  Buy a fund with the right duration today and then come back in 10 years time and use it to buy the annuity hoping that if your capital today would buy you an annuity of £6k pa then in 10 years your capital will still buy you £6kpa

Or are they expecting it will be £6kpa plus 10 years of inflation?

SVaz

Well, yes, Index linked means exactly that. 

The maturity payouts are uplifted by however much inflation there has been. That’s why they are quite a bit more expensive. 

You could gamble with ordinary Gilts,  if inflation  stayed very low then they would be better due to the lower prices paid but nobody knows the future.  

itwasntme001

DRS1 said:

So a layman's conclusion from that is that you can't adopt a buy and forget policy.  You would have to keep tweaking for things like getting older and changes in yield.  Is that right?

I may be wrong but I think people looking to lock in today's annuity rates are thinking of a buy and forget approach.  Buy a fund with the right duration today and then come back in 10 years time and use it to buy the annuity hoping that if your capital today would buy you an annuity of £6k pa then in 10 years your capital will still buy you £6kpa

Or are they expecting it will be £6kpa plus 10 years of inflation?

You should expect £6k plus inflation.  The index-linked bond fund should hedge for that as long as the duration is appropriate as the previous poster said.

You need to be reducing the duraiton of the bond fund as time passes.  Unfortunately for my pension I only have one index linked bond fund available and this has a duraiton of around 15 years.  I am in my earlys 40s and as per the previous poster, I would need a roughly 23 year duration to be close to being hedged.  I am therefore running the reinvestment risk with the bond fund because yields might fall as I continue to hold the fund and the fund reinvests at lower yields as bonds mature.

It is a serious risk.

masonic

itwasntme001 said:

DRS1 said:

So a layman's conclusion from that is that you can't adopt a buy and forget policy.  You would have to keep tweaking for things like getting older and changes in yield.  Is that right?

I may be wrong but I think people looking to lock in today's annuity rates are thinking of a buy and forget approach.  Buy a fund with the right duration today and then come back in 10 years time and use it to buy the annuity hoping that if your capital today would buy you an annuity of £6k pa then in 10 years your capital will still buy you £6kpa

Or are they expecting it will be £6kpa plus 10 years of inflation?

You should expect £6k plus inflation.  The index-linked bond fund should hedge for that as long as the duration is appropriate as the previous poster said.

You need to be reducing the duraiton of the bond fund as time passes.  Unfortunately for my pension I only have one index linked bond fund available and this has a duraiton of around 15 years.  I am in my earlys 40s and as per the previous poster, I would need a roughly 23 year duration to be close to being hedged.  I am therefore running the reinvestment risk with the bond fund because yields might fall as I continue to hold the fund and the fund reinvests at lower yields as bonds mature.

It is a serious risk.

An individual index linked gilt (or a few) would mitigate that risk, and avoid the need for rebalancing along the way. I'm gradually adopting an approach that involves a ladder up to SPA and a long ILG that will be sacrificed for an annuity. But some of my pension savings aren't in a place where I can hold individual gilts, so until I can transfer that I also hold an ILG index fund.

Secret2ndAccount

You can't lock in a price for anything to purchase in 10 yers' time. Not a car; not a house; not a chicken. An annuity is one product where you could realistically price it for provision in 10 years, since they are already commiting to continue paying you for potentially decades. It appears there is not sufficient demand. For a decade, nobody has wanted to buy an annuity, now everybody wants one. If it stays like this for a number of years perhaps a disruptor will come along and start offering all sorts of useful products (a single annuity that pays out 12k extra until SPA then drops?  A product that matches wage inflation instead of CPI?). Until then, all you can do is build a nearest equivalent solution for yourself.
A single bond, TR35 would pay inflation plus 1.6% over 10 years. Or buy TR40 which pays CPI+2%. After 10 years (or at any other time) it is likely you could sell it for an amount roughly commensurate with the expected gain. If the price wasn't what you expected, there's a fair chance that annuity prices would have canceled out the error. The bad news is that you might not get exactly the annuity you hoped for. The good news is that you can get your money back at any time if live intervenes. Or you might get more...

JoeCrystal

Especially there seem to be a focus on Collective defined contribution (CDC) scheme as well. Been reading about these at the moment, trying to get my head around it in case if it is going to be another option as well.

itwasntme001

masonic said:

itwasntme001 said:

DRS1 said:

So a layman's conclusion from that is that you can't adopt a buy and forget policy.  You would have to keep tweaking for things like getting older and changes in yield.  Is that right?

I may be wrong but I think people looking to lock in today's annuity rates are thinking of a buy and forget approach.  Buy a fund with the right duration today and then come back in 10 years time and use it to buy the annuity hoping that if your capital today would buy you an annuity of £6k pa then in 10 years your capital will still buy you £6kpa

Or are they expecting it will be £6kpa plus 10 years of inflation?

You should expect £6k plus inflation.  The index-linked bond fund should hedge for that as long as the duration is appropriate as the previous poster said.

You need to be reducing the duraiton of the bond fund as time passes.  Unfortunately for my pension I only have one index linked bond fund available and this has a duraiton of around 15 years.  I am in my earlys 40s and as per the previous poster, I would need a roughly 23 year duration to be close to being hedged.  I am therefore running the reinvestment risk with the bond fund because yields might fall as I continue to hold the fund and the fund reinvests at lower yields as bonds mature.

It is a serious risk.

An individual index linked gilt (or a few) would mitigate that risk, and avoid the need for rebalancing along the way. I'm gradually adopting an approach that involves a ladder up to SPA and a long ILG that will be sacrificed for an annuity. But some of my pension savings aren't in a place where I can hold individual gilts, so until I can transfer that I also hold an ILG index fund.

I would transfer to another pension provider that gives me ability to buy direct gilts if I could retain my 55 yr age access, but thats impossible.

masonic

itwasntme001 said:

masonic said:

itwasntme001 said:

DRS1 said:

So a layman's conclusion from that is that you can't adopt a buy and forget policy.  You would have to keep tweaking for things like getting older and changes in yield.  Is that right?

I may be wrong but I think people looking to lock in today's annuity rates are thinking of a buy and forget approach.  Buy a fund with the right duration today and then come back in 10 years time and use it to buy the annuity hoping that if your capital today would buy you an annuity of £6k pa then in 10 years your capital will still buy you £6kpa

Or are they expecting it will be £6kpa plus 10 years of inflation?

You should expect £6k plus inflation.  The index-linked bond fund should hedge for that as long as the duration is appropriate as the previous poster said.

You need to be reducing the duraiton of the bond fund as time passes.  Unfortunately for my pension I only have one index linked bond fund available and this has a duraiton of around 15 years.  I am in my earlys 40s and as per the previous poster, I would need a roughly 23 year duration to be close to being hedged.  I am therefore running the reinvestment risk with the bond fund because yields might fall as I continue to hold the fund and the fund reinvests at lower yields as bonds mature.

It is a serious risk.

An individual index linked gilt (or a few) would mitigate that risk, and avoid the need for rebalancing along the way. I'm gradually adopting an approach that involves a ladder up to SPA and a long ILG that will be sacrificed for an annuity. But some of my pension savings aren't in a place where I can hold individual gilts, so until I can transfer that I also hold an ILG index fund.

I would transfer to another pension provider that gives me ability to buy direct gilts if I could retain my 55 yr age access, but thats impossible.

Another option is to hold the gilts in a different account (e.g. S&S ISA) while holding other investments in your pension. When the time comes, you can sell and repurchase assets between the accounts to retain the other investments while releasing the cash in your pension.

itwasntme001

masonic said:

itwasntme001 said:

masonic said:

itwasntme001 said:

DRS1 said:

So a layman's conclusion from that is that you can't adopt a buy and forget policy.  You would have to keep tweaking for things like getting older and changes in yield.  Is that right?

I may be wrong but I think people looking to lock in today's annuity rates are thinking of a buy and forget approach.  Buy a fund with the right duration today and then come back in 10 years time and use it to buy the annuity hoping that if your capital today would buy you an annuity of £6k pa then in 10 years your capital will still buy you £6kpa

Or are they expecting it will be £6kpa plus 10 years of inflation?

You should expect £6k plus inflation.  The index-linked bond fund should hedge for that as long as the duration is appropriate as the previous poster said.

You need to be reducing the duraiton of the bond fund as time passes.  Unfortunately for my pension I only have one index linked bond fund available and this has a duraiton of around 15 years.  I am in my earlys 40s and as per the previous poster, I would need a roughly 23 year duration to be close to being hedged.  I am therefore running the reinvestment risk with the bond fund because yields might fall as I continue to hold the fund and the fund reinvests at lower yields as bonds mature.

It is a serious risk.

An individual index linked gilt (or a few) would mitigate that risk, and avoid the need for rebalancing along the way. I'm gradually adopting an approach that involves a ladder up to SPA and a long ILG that will be sacrificed for an annuity. But some of my pension savings aren't in a place where I can hold individual gilts, so until I can transfer that I also hold an ILG index fund.

I would transfer to another pension provider that gives me ability to buy direct gilts if I could retain my 55 yr age access, but thats impossible.

Another option is to hold the gilts in a different account (e.g. S&S ISA) while holding other investments in your pension. When the time comes, you can sell and repurchase assets between the accounts to retain the other investments while releasing the cash in your pension.

But what if the pension investments fall in value; I might not get the expected annuity income as the pension would annuitise on a lower value.

Also its sub-optimal from a tax perspective as ideally you want growth assets in ISA and bonds in pension instead of the other way around.

I think I might just accept the reinvestment risk and have a portion of the pension still invested in equities so hopefully make up for any reduction in annuity income that might result due to reinvestment risk.

masonic

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

itwasntme001 said:

DRS1 said:

So a layman's conclusion from that is that you can't adopt a buy and forget policy.  You would have to keep tweaking for things like getting older and changes in yield.  Is that right?

I may be wrong but I think people looking to lock in today's annuity rates are thinking of a buy and forget approach.  Buy a fund with the right duration today and then come back in 10 years time and use it to buy the annuity hoping that if your capital today would buy you an annuity of £6k pa then in 10 years your capital will still buy you £6kpa

Or are they expecting it will be £6kpa plus 10 years of inflation?

You should expect £6k plus inflation.  The index-linked bond fund should hedge for that as long as the duration is appropriate as the previous poster said.

You need to be reducing the duraiton of the bond fund as time passes.  Unfortunately for my pension I only have one index linked bond fund available and this has a duraiton of around 15 years.  I am in my earlys 40s and as per the previous poster, I would need a roughly 23 year duration to be close to being hedged.  I am therefore running the reinvestment risk with the bond fund because yields might fall as I continue to hold the fund and the fund reinvests at lower yields as bonds mature.

It is a serious risk.

An individual index linked gilt (or a few) would mitigate that risk, and avoid the need for rebalancing along the way. I'm gradually adopting an approach that involves a ladder up to SPA and a long ILG that will be sacrificed for an annuity. But some of my pension savings aren't in a place where I can hold individual gilts, so until I can transfer that I also hold an ILG index fund.

I would transfer to another pension provider that gives me ability to buy direct gilts if I could retain my 55 yr age access, but thats impossible.

Another option is to hold the gilts in a different account (e.g. S&S ISA) while holding other investments in your pension. When the time comes, you can sell and repurchase assets between the accounts to retain the other investments while releasing the cash in your pension.

But what if the pension investments fall in value; I might not get the expected annuity income as the pension would annuitise on a lower value.

Also its sub-optimal from a tax perspective as ideally you want growth assets in ISA and bonds in pension instead of the other way around.

Well it really depends on what else you invest in and how much of your retirement savings you intend to annuitise. And how long you have before you intend to purchase your annuity. How much above RPI/CPIH + 2% are you targeting for your ISA for the next 10 years for example?

In the scenario where your growth assets underperform the ILG, which is a concern for you, if you were planning to use almost all of your pension savings to buy an annuity, then yes you'd be limited in the size of annuity you could buy. But you'd also have a larger ISA pot that had effectively moved some of your assets out of tax deferred status - and it would, to some extent, be going back into equities at or near a market low. This would give you more freedom, although you could still choose to convert that tax free piece to taxable income if you wished.

In the scenario where your growth assets outperform the ILG, then that may leave you with more pension than required annuity, but you'd also be in the position of having more overall than you need at the point of securing an annuity, so yes, not optimal for tax, but I'd categorise as a nice problem to have.

Personally, I'm only planning to annuitise on about 20% of my total pots. That excludes the pre-SPA ladder. So I'll just be securing an income floor, which will be supplemented by other assets I'll keep invested.