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Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

General discussions about equity high-yield income strategies
OLTB
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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13255

Postby OLTB » December 8th, 2016, 10:54 am

thebarns wrote:
For those of us with nothing else to fall back on, no other properties, final salaries etc, I think we have to consider what we would do in that situation and whether HYP really does cover that unlikely but possible situation compared to an annuity/gold/government bonds etc.



Thanks for your comments thebarns and I can imagine it's a very uncertain time for you given the tone of your threads. For what it's worth, I think my approach would be to secure guaranteed income that meets my essential spending - State Pensions (perhaps two if married?) are a good start (£155 pw x 2: £1,343 p.m. as long as 35 years of NI contributions) then perhaps buy an annuity that covers any difference. As you have HYP shares and an IT income portfolio, perhaps these would cover the nice to haves in retirement?

If it helps, I have looked at the IT Income Portfolio from John Baron on the IC that includes a number of different assets away from UK shares so perhaps this would give you the diversification you need?

I sincerely hope you arrive at the correct decision for your own situation.

Best, OLTB.

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13266

Postby thebarns » December 8th, 2016, 11:12 am

Thanks also to OLTB and ******.

I think I need to retire and spend a year researching all of this, it is not simple if one is solely relying on HYP in retirement and I'm sort of getting the message that it would be unwise to put all my eggs in this basket and face up to needing a larger capital sum or a smaller income and not be seduced by the yield of HYP.

The conundrum and trade off of working for longer, how long will the health last, how much income do I need and how much of the pot should be left as an inheritance....

If I only knew what Mr Market was going to do.......

And I still think this is an impending crisis for millions in this country as final/career salary risk free schemes reduce in number and millions are left to fend for themselves, a fraction of a minuscule percent whom will ever read the information on this site.

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Poster ID and/or quote removed on request of poster. Raptor.

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13374

Postby Breelander » December 8th, 2016, 3:35 pm

thebarns wrote:I think I need to retire and spend a year researching all of this, it is not simple if one is solely relying on HYP in retirement...


No, it isn't. I have the 'safety net' of a meagre workplace pension. That is just enough to keep the lights on and the house warm, with only enough left over for a 'bread and water' diet. When I declared my HYP to be 'complete' at the end of 2011 both sources generated the same income. The pension has increased by RPI since then but the HYP income has increased by more, so I'm happy.

OLTB
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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13391

Postby OLTB » December 8th, 2016, 4:03 pm

Breelander wrote:
No, it isn't. I have the 'safety net' of a meagre workplace pension.


And there was me thinking of transferring away my meagre DB pension (£400 p.m. when it kicks in) to run myself...time to rethink and step back a bit I think! Trouble is, the CETV is soooooo appealing!

OLTB.

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13412

Postby Breelander » December 8th, 2016, 4:49 pm

OLTB wrote:And there was me thinking of transferring away my meagre DB pension...


Defined Benefit pensions are gold dust - they don't make them like that any more. IMHO the costs of transferring them eats up more than can be gained by managing the resulting capital yourself.

OLTB
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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13422

Postby OLTB » December 8th, 2016, 5:04 pm

You're right Bree and I do need to take a portfolio approach (various income sources) rather than just look at the capital values no matter how tempting - I suppose when it comes to retirement income, the capital value is pretty much irrelevant, it's the income (and how that is structured i.e. variable/guaranteed) that matters.

I will put the transfer paperwork away in the 'stupid boy, Pike' drawer.

OLTB.

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13439

Postby tjh290633 » December 8th, 2016, 6:09 pm

One way I have of demonstrating the rising value of investments, principally an HYP, is by comparing their share of total income:

Year to        Pensions      Investments
05-Apr-99 72.64% 27.36%
05-Apr-00 73.87% 26.13%
05-Apr-01 73.47% 26.53%
05-Apr-02 72.87% 27.13%
05-Apr-03 72.66% 27.34%
05-Apr-04 69.87% 30.13%
05-Apr-05 67.89% 32.11%
05-Apr-06 61.75% 38.25%
05-Apr-07 59.60% 40.40%
05-Apr-08 54.31% 45.69%
05-Apr-09 56.75% 43.25%
05-Apr-10 66.96% 33.04%
05-Apr-11 61.85% 38.15%
05-Apr-12 59.11% 40.89%
05-Apr-13 58.71% 41.29%
05-Apr-14 55.72% 44.28%
05-Apr-15 54.23% 45.77%


The dip in investment income in FY 2009-10 is obvious.

TJH

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13470

Postby Wasron » December 8th, 2016, 7:41 pm

Breelander wrote:
OLTB wrote:And there was me thinking of transferring away my meagre DB pension...


Defined Benefit pensions are gold dust - they don't make them like that any more. IMHO the costs of transferring them eats up more than can be gained by managing the resulting capital yourself.


I'm in the process of transferring a DB pension into a SIPP. The TV offered is 34x the annual pension, which seems like good value given that it does then become a much more flexible income that could potentially be passed onto the next generation.

WasRon

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13542

Postby OLTB » December 9th, 2016, 7:26 am

Moderator Message:
Poster ID and/or quote removed on request of poster. Raptor.


Thanks ****** and the points you raise are compelling - I think on reflection I"m inclined to stick as well - gives at least a guarantee of some regular RPI linked income for life.

On the point above though - aren't the trustees obliged to provide a transfer value and is it not the case that the value is determined by underlying gilt rates etc., rather than as some sort of persuasion tool to rid themselves of years of liability?

The CETV multiple was in the region of 35 x pension for me as well by the way...

Cheers, OLTB.

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13560

Postby Stonge » December 9th, 2016, 9:01 am

There was an article on Monevator recently

http://monevator.com/weekend-reading-me ... y-pension/

OLTB
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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13698

Postby OLTB » December 9th, 2016, 3:48 pm

Stonge wrote:There was an article on Monevator recently



I don't know whether to thank you Stonge or curse you - after reading Merryn's article I've taken the paperwork out of my 'stupid boy, Pike' drawer.

Cheers, OLTB.

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13704

Postby Wasron » December 9th, 2016, 4:06 pm

1nv35t wrote:
Wasron wrote:I'm in the process of transferring a DB pension into a SIPP. The TV offered is 34x the annual pension, which seems like good value given that it does then become a much more flexible income that could potentially be passed onto the next generation.

Interesting indicative figure. Thanks.

Say a couple of years DB pension lump sum upon hitting age 60 retirement age, that leaves around 32 years of pension cover ... up to age 92. Good chance (!!!) that you don't live that long such that there'd be residual funds available for heirs. Risk that you might not achieve inflation pacing return after costs/taxes.


For context I'm 39 and work in IT in financial services. I work closely with actuaries and pension specialists and all the pensions people follow conventional wisdom and suggest keeping the DB pension, and all of the actuaries have already transferred their DB pensions into a PP or SIPP.

Wasron

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13723

Postby OLTB » December 9th, 2016, 4:25 pm

Wasron wrote: I work closely with actuaries and pension specialists and all the pensions people follow conventional wisdom and suggest keeping the DB pension, and all of the actuaries have already transferred their DB pensions into a PP or SIPP.

Wasron


Actuaries are rarely wrong when it comes to statistics and risks!

Thanks Wasron...

OLTB

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#13780

Postby Wasron » December 9th, 2016, 6:31 pm

I should point out that the scheme in question is essentially closed, so the choice is between a preserved DB pension increasing by CPI until retirement or transferring away.

The view of the actuaries was that a lot of cash was on offer, due to low interest rates and low annuity rates. If in future annuity rates rise, on the back of rising inflation and/or lower bond prices then there's always the option of buying an annuity after all.

Wasron

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#14093

Postby flyer61 » December 11th, 2016, 11:22 am

What an interesting thread! The comment concerning the actuaries transferring their DB benefits into SIPPS/PP's had me in stitches. Just like the MP's all having their London pads paid off.....

The UK pension system in a nut shell. State pension....anybody hear of anybody not being paid it.....No, thought not, generally simple and works. The pension industry attached to retirement income, anybody hear of high fees, poor performance, opaque charging, constantly changing rules and for the money parted with not worth the cake.....Lots...thought so. In short it is buyer beware, tax relief etc should not wag your retirement planning.

I could go on but better not as may run out of BP tablets. The DB scheme I was a member of was significantly underfunded and the owners of the business decided they would cut their losses and run. This they did this with an RAA. Another word for legalised theft. Many people were buried by this after decades of service. They did the right thing and have been royally shafted. The business carried on as if nothing had happened.
So why bring this up. Well I transferred out just before it began the PPF assessment period.

The PPF is designed to protect the pension industry not you.

My transfer figure was terrible given what i gave up even on what the PPF would give me. However a couple of things come to mind. After two years I had turned my 500K into 593K of which I took 25% at the first opportunity. The rest remains invested and I continue to work. My wife gets the lot if anything happens to me. My kids might end up not having to do pension when they are older ( a huge plus in my eyes) The PPF only gives a widows benefit of 50% of what you are in receipt of at the time of your demise. My old dear will get the lot this way.

So if there is any chance of your scheme ending up in the PPF and for many this can come out of the blue consider transferring out at the earliest opportunity.

Sorry if a little thread drift...

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#14269

Postby Wasron » December 12th, 2016, 8:36 am

flyer61 wrote:What an interesting thread! The comment concerning the actuaries transferring their DB benefits into SIPPS/PP's had me in stitches. Just like the MP's all having their London pads paid off.....

...I could go on but better not as may run out of BP tablets. The DB scheme I was a member of was significantly underfunded and the owners of the business decided they would cut their losses and run...


In my particular case the scheme funding isn't an issue and the actuaries who have transferred had no oversight of our scheme, but I accept the general sentiment of your post...

Wasron

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#14893

Postby taken2often » December 13th, 2016, 11:08 pm

A simple question but as usual complicated. I am no expert but I will try a few answers. To the question yes and no. The annuity starts immediatley
the HYPE takes time for the income to flow in. After one year you should know what your income is.

I invest for income and not a HYPE, so my average buying yield will be much higher than the Ftse. If you wish to buy, and hands off then a Vanguard
60% equity 40% bond type income or 80/20%. would work. The down side of this is if it is a accumulation fund then you have to sell units for income. Usually bad news when the markets are down.

Some consider their State pension the Bond element and have 100% equity fund. If so I would only buy income and forget the capital and total return. I would also try to spend 80% of income if needed and reinvest 20% for indexing.

For an annuity to work you would need to live to a 100, especially if it is indexed.

A Sipp income should be superior to an annuity. Wife or Partner can continue the same income after you die. You should always have capital available
to increase your income say after 85 as you can run down the capital, or not and the residue can be handed on and on and on.

Hope some of this is helpful

Bob

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#15008

Postby OLTB » December 14th, 2016, 1:31 pm

taken2often wrote:
Hope some of this is helpful

Bob


Many thanks Bob (and other contributors) - the responses have all been very informative and useful in gathering others thoughts.

Thanks, OLTB

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#19704

Postby bionichamster » January 3rd, 2017, 1:30 pm

I think it's possible that those that bought an all in HYP a la pyad as an annuity alternative have nothing more to say or do, probably hardly frequented or at least contributed to the TMF boards and similarly don't need to waste their days over here chatting about triming, top ups or weightings, diversification or minimum number of pick.



A few years ago I made some comparisons with the performance of PYAD's HYP1 demonstartion potfolio and an annuity that could have been purchased at the same time with the same money. I repeated the comparison a couple of times (here's a link to year 11: http://boards.fool.co.uk/hyp1-benchmark-comparison-12407288.aspx)

A good annuity rate at the time for a flat rate annuity was £5662 and £5212 (60 YO male and female respectively)

As you can see after 11 years the income from HYP1 still didn't match the flat rate annuity. However one could argue that occasionally pruning and reallocating investments in the HYP and it might have done better income wise; also perhaps HYP1 just happens to have existed in a particularly bad time span (aren't they all) but it still has the advantage of being available for all manner of other uses (kid's house deposit, passing on when you pass on etc..) Also the HYP could be in an ISA where withdrawl could be tax free or presumably drawdown from a SIPP could be managed to be more tax efficient in comparison to an annuity? However the HYP seems to be increasing reliant on a few dominant shares that make up the majority of the dividend payments and thus could be vulnerable to a shock in the future if one of those companies flies into a flock of black swans.

It's worth noting that now 16 years on from its inception HYP1 has finally outstripped the flat rate annuity but it took 13 years to do so (2013 it produce £5828) although it fell back below the male annuity in 2014 by a few pounds (£5601) before hitting £6093 in 2015, not sure about the 2016 figures but looking foward to seeing them, I expect it will be accelerating away from the annuity now.

What does that say about HYP as an "immediate replacement" for an annuity? Well it certainly indicates that it's more complicated than one might think and you must seriously consider a range of factors other than the headline income rate when comparing. For me the HYP wins on most counts, but for a short life expectancy retiree with no heirs and who wants a simple life then perhaps the annuity has some serious merit? Mind you I think annuity rates are not as good now so maybe not....

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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

#19780

Postby taken2often » January 3rd, 2017, 5:51 pm

An indexed annuity would have started at around 3k plus and would take a very long time to catch up. Make it a joint life, even longer.

You also have to keep in mind the 2008/2009 market crash. I bought a lot of cheap income then and still have it. The problem with Hype is that they
tend to have about 15/20 shares so when they take a hit it can be substantial.

Over a 20/30 year period a DIY portfolio with modest charges should out perform an annuity. Especially if you reinvest 20% of the yield per year.

Bob


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