MSE News: Pension income could fall due to quantitative easing

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
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  • edited 8 October 2011 at 6:56PM
    JHCJHC Forumite
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    edited 8 October 2011 at 6:56PM
    Certainly, things go in cycles. At present we have low gilt yields and hence poor annuity rates. But in the not-too-distant-future inflation will increase significantly (due to all the money printing) - which will decimate the value of flat rate annuities being taken out now.

  • gadgetmindgadgetmind Forumite
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    JHC wrote: »
    Certainly, things go in cycles. At present we have low gilt yields and hence poor annuity rates. But in the not-too-distant-future inflation will increase significantly (due to all the money printing) - which will decimate the value of flat rate annuities being taken out now.

    There are only good two reasons why someone might take out a flat rate annuity.

    1) They don't expect to live long enough for an escalating annuity to pay more.
    2) To let them benefit from flexible drawdown.

    Of course, on the bad reason list we have jam-today-sod-tomorrow greed.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • gadgetmind wrote: »
    Glad you asked. With a high degree of certainty, the lottery will lose your entire capital whereas pensions will return about 6% above inflation. Choose the lottery if you want, but I know where my money is going.

    Agreed that lotteries would be an almost guaranteed loss but
    Slightly misleading on the 6% above inflation.

    6% from well diversified equities if they represent 100% of the portfolio might be alon the right track, but 100% in equities wouldn't be everone's cup of tea. I would suggest that most people would have portfolios that include more defensive assets.

    Even then after accounting for any costs on the investment (everything from initial charges, annual charges and less predictable costs such as stamp duty and spreads in trading) then 6% would be wildy optimistic.
  • edited 9 October 2011 at 1:36AM
    jamesdjamesd Forumite
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    edited 9 October 2011 at 1:36AM
    gadgetmind, some additional good reasons for choosing a level annuity over an escalating one:

    3) expectation of reduced income needs in the future, so the gradual decrease in real income from a level annuity may be ideal, providing more income when higher spending is desired.

    4) the long payback time before an escalating annuity breaks even with a level one, into the high 80s for a purchase at age 65. That can make taking a level annuity and investing part of the extra initial income a significantly better option because the investment returns may be sufficient to prevent the escalating annuity from ever catching up.

    Income drawdown should beat annuities of any type for income until age 75 or older anyway so for those willing to use drawdown that can make it moot unless flexible drawdown is desired.
    6% would be wildy optimistic
    I disagree for two main reasons:

    1. A mixture of equities and bonds that includes significant high yield bond exposure should be able to exceed that target after costs.
    2. For pensions we're effectively discussing drawdown and capital preservation is not required. The capital can be used to sustain the income level provided the rate of capital value drop isn't excessive.

    For the reasons above I use 6% as my main planning case, with 4% after a 50% market drop as the sort of thing that I use for very bad case contingency planning. Though I also expect to vary spending.
  • John_PierpointJohn_Pierpoint Forumite
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    gadgetmind wrote: »
    Long term, I expect my pension to be in better shape as a result of this turmoil.

    Reason 1 is because I'm paying in every month.

    Reason 2 is here -
    http://citywire.co.uk/money/sharpen-your-asset-allocation-skills-to-profit-from-the-volatility/a529862

    Interestingly, that article, sensible though it is, under plays inflation.
    "Cash is making almost nothing"; the reality is that cash is probably making -3% in real terms and the eventual pension might well be taxed at 20% - 30% - 40%. 72/3 = 24 ---> the years it will take for the cash pot to halve in value.
    If the GDP per head in the economy is stagnant or decreasing, it requires an Indian Rope Trick to stay ahead of the curve.
  • gadgetmindgadgetmind Forumite
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    6% would be wildy optimistic.

    Well, you might be able to talk me down to 5%, but even my bonds have done better than that!
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • gadgetmindgadgetmind Forumite
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    jamesd wrote: »
    For the reasons above I use 6% as my main planning case, with 4% after a 50% market drop as the sort of thing that I use for very bad case contingency planning. Though I also expect to vary spending.

    In my pre-retirement plan, I have 4.25% after costs with (my personalised) inflation at 3.5%. Yes, I'm not building much growth ahead of inflation into my plan.

    I continue to run these figures post-retirement with drawdown of 5.3% on pensions for the 11 years to state pension and sufficiently less thereafter to avoid HR tax.

    If I do get significant real growth over the next 7 years, which I have in the past, things get well rosy!
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • gadgetmindgadgetmind Forumite
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    it requires an Indian Rope Trick to stay ahead of the curve.

    Not just Indian. You might also like to look at Brazil, Russia, China, Pacific Rim, Frontier Markets, and much more. :D
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
  • John_PierpointJohn_Pierpoint Forumite
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    Is that ">5%" after taking inflation into account?
  • gadgetmindgadgetmind Forumite
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    Is that ">5%" after taking inflation into account?

    Yes, because I saw very good capital growth of my bonds prior to selling them because of the predictions of rising interest rates. Of course, I sold too soon, but that's life.

    There is a school of thought that says you shouldn't try and time asset reallocation, or take into account macro-economic factors, but I'm just not into "strategic ignorance".
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
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