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Annuity vs Gilt ladder
Comments
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Yeah, sequence of returns early on and longevity at the other end are the risks mitigated by annuity with more certainty than asset allocation and safe withdrawal rates. In my modelling I'm using equities for inflation beating returns, so far besting annuity rates which are more attractive at these levels than just a few years back. Quotes I've seen in this thread are interesting but I'm away off 60 yet.. The certainty and risk-off of annuities and longevity insurance makes then useful just not for me yet. Cash collecting a few percent is handy for shopping. I need the potential growth of equities to supply me the income I crave in my post employment life. Gilts for certain expected spending currently play a part and a longer index linked ladder could be established later.
A gilt ladder to fill between employment income and cracking into the SIPP will be useful. When I start looking at the SIPP for monthly income I can think again about annuity or another ladder.
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If that happened all the annuity providers would go bust. Just like all house insurers would go bust if everyone's house got destroyed eg in a war (which is why they have exclusions).
Annuities just like insurances work on the basis of pooling risk, if that risk suddenly changes for everyone then their business model is screwed.
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For clarity, basically, cohort life expectancy makes assumptions about future improvements in medical science prolonging lifespans, whereas period tables do not (and use mortality data from the period described - ie the latest release uses mortality data from the 3 yr period 2022-24)
Life expectancy for a 65yo male……period=19.06 years, cohort=20.09
Life expectancy for a 60yo female……period=25.82 years, cohort=27.53
It's up to each to decide which to use in their planning…….though I suppose the more conservative approach would be to use the cohort numbers.
In the end though it's all guesswork really as few of us have any real idea of our lifespan (thankfully)……..the other data you could use (again it's a projection) is the survivor rate…….assuming I'm reading it right of course, the latest data apparently suggests that for each 100,000 males born 95 years ago, about 7,000 (7%) would still be alive today if, throughout their lives, they had been subject to the mortality rates seen in the period 2022-24 (the actual number still alive will be lower as mortality rates were much higher in the past - a couple of world wars, undoubted improvements in medical science and lifestyle knowledge (smoking/drinking etc) as the years passed, ensures that) - (for 90yo females, the number is 34251 (34.25%).
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No - annuities act as assurance against your actual life span exceeding your expectations. Overall life expectancy is irrelevent.
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we'd much prefer our beneficiaries to have whatever's left, rather than an insurance company
You're missing the whole point of annuities. What's left over if you die early doesn't go to the insurance company, it goes to the people who live longer than average. This cross-subsidy is what makes annuities cheaper than a gilt ladder that runs all the way to extremes of old age. The instant you add a 30 year guarantee you completely remove this cross subsidy.
By all means buy your gilt ladder instead, and a plane ticket to Switzerland in case you outlive it.
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Very drole…..for my info and forgive my terminology - I assume the 30 year guarantee is "cheaper" than the life annuity else one receives more per annum than the life?
Under what circumstances would one take out (say) a 30 year guarantee at SP age - say 67. I can't see much chance of me exceeding 97 years old, so it may be an option.
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MK62 was comparing a 30 year gilt ladder to an annuity with a 30 year guarantee - ie one that lasts for the whole of your life and if you both die within the 30 year guarantee period, it keeps on paying to your heirs until the 30 years are up. It should be no surprise at all that the annuity gave a lower income - it's basically trying to replicate the gilt ladder and then add cover for everything beyond 30 years on top.
A 'whole life' annuity without a guarantee would be much cheaper and probably cheaper than the 30 year gilt ladder, ie you'd get more income from your pot. That's because it can be calculated on the basis of only having to last for your average lifespan, because those who die early subsidise those who don't. As soon as you start adding in guarantee periods, then you start to lose that benefit and the price goes up.
Where annuities with long guarantee periods have been talked about recently is where the buyer fully expects to die well within the guarantee period and is hoping for a better IHT treatment for their heirs if they leave them the remaining annuity income instead of leaving them capital in the pension.
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Superb explanation - many thanks.
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I was unaware that insurance companies offer annuities for free…..😉…..for those annuity holders who die early with no guarantee, do you really believe that it all then gets redistributed to other annuitants? In any case, you missed the point…..without an annuity guarantee, whoever gets what's left is irrelevant to us……it's not our beneficiaries……so to rephrase "if we both die early, we'd much prefer our beneficiaries to have whatever's left, rather than an insurance company and it's other annuity customers"…….
As for the plane ticket, on the other hand, if you die early with your unguaranteed annuity, your "beneficiaries" will get nothing, as the insurance company will keep everything that's left (even if they then redistribute some of it to their other annuity customers)……
That's the trade-off in the end……..for a 65yo male (for example) without a partner or any beneficiaries (such as children etc) to worry about, there's little doubt the annuity route will offer a higher income than any "equivalent" 30yr gilt ladder (and comes with the lifetime income guarantee, where the gilt ladder does not). However, once you add partner and beneficiaries into the mix, the choice is nowhere near as clear cut…….
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To put some real numbers on some of the various options for an average couple at ages Male 65, Female 60, no health conditions……..
A 'whole life' annuity without a guarantee would be much cheaper and probably cheaper than the 30 year gilt ladder, ie you'd get more income from your pot.
30yr IL gilt ladder - current payout £4564 (assuming 3% interest on coupons…oh and on maturing gilts until paid out )……of course, you'd also have to factor in the annual cost of the account containing the ladder too.
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