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

General discussions about equity high-yield income strategies
Jon46
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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

Postby Jon46 » December 7th, 2016, 10:13 pm

tjh290633 wrote:
OLTB wrote:Wow - thanks TJH, I'm not too sure I fully understand what unitising a set of numbers does, but from what I can see, it means that the historical dividend income has increased by 736.53% over the 29 year history (an average annual increase of 25.40% - if you can average a unitised increase??) compared to an RPI rebase of 156.78% (5.40% average over the same period). As your chart shows, there have been some pretty wild swings from one year to the next, but holding firm has resulted in a superb outperformance against RPI.

If correct - and I'm hopeful that someone will correct me if I'm not as I'm here to learn - that is a compelling argument.

Cheers, OLTB.


You need to do the maths differently. The divis per unit have multiplied by a factor of 8.3653 over the 29 years. Rather than an average you need to find the rate at which they have compounded, which is the 29th root of 8.3653 minus one, ie 7.60%.

Meanwhile RPI has multiplied by 2.5678, leading us by the same method to a compounding rate of 3.31%.

So the divis per unit, in real terms, have compounded at (1.0760)/(1.0331)-1 which is 4.16%.

Bear in mind too that the actual income will depend on how the number of units has progressed, so will have increased by a larger factor as money was added and not all income taken.

Unitisation, as TJH explained, is straightforward. Few people, having taken the plunge, stop doing it. It is particularly useful at the building stage imho, and can be started at any time.

Its purpose is to remove the distorting effects of cash being added and withdrawn from the portfolio. Without such a method, an investor will look at the divi income increasing but gradual cash movements will mask how underlying dividends are actually progressing.

Jon

PS I too assemble key data in monthly buckets( I find that it makes graphs neater over long periods), including unitisation, doing it automatically by recording all portfolio activity ONCE as it happens in tables rather than a plain spreadsheet, and using pivots extensively to link to other tables and compute subsequent measures, thus creating a database-like tool. It is not complicated and only needs to be set up once and is very versatile, for example the full history of any holding can be extracted, including performances measures, without storing it separately, which would often lead to typing in the same data twice, a big no no for me. I cannot recommend this method strongly enough.

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

Postby Breelander » December 7th, 2016, 11:02 pm

OLTB wrote:
Breelander wrote:What income could each produce? ... £3,213 at an escalating rate.


Thanks for that useful info Bree - ... if I assume that the increase in annuity income is at the BofE target inflation rate of 2%...


The basic guidance table I linked to said it's a fixed 3% escalation. I didn't dig deeper to see if RPI-linked annuities are available (they probably are) as I wasn't that bothered in finding out - like you, "...for me, it's a no-brainer". Personal choice though, for some the reliability of annuity income could outweigh the potentially lower income.

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

Postby thebarns » December 8th, 2016, 12:47 am

Oltb,

"for me it is a no brainer".......

Almost describes the way I collect my HYP shares.....

That aside, I have taken note of 1nv35t and Loot.

And not so much in the building stage when there can be time and additional earned money to throw at bombed out shares and drastic cuts in dividends.

What if the run from 1980 onwards was a golden period and we have a crash knocking off both 50% capital value and 50% dividend cuts that takes 20 years to correct.

What does that do for someone who has retired or just about to retire and had everything in HYP ?

Catastrophic implications ?

So an annuity should protect against this, as long as the insurance companies do not collapse which is very unlikely. And if part of the HYP had instead gone into gold or certain government bonds, then might the retiree be better advised to do that? Of course we will still need an income and that would have to be generated by sales of gold/bonds etc.

A portfolio of income producing investment trusts would also get walloped.

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.

I have to really think more deeply about that before I do retire in the nearish future and wonder if I really have all bases covered.

1nv35t
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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

Postby 1nv35t » December 8th, 2016, 10:17 am

thebarns wrote:What if the run from 1980 onwards was a golden period and we have a crash knocking off both 50% capital value and 50% dividend cuts that takes 20 years to correct.

... or worse!

See the chart I linked to in http://lemonfool.co.uk/viewtopic.php?p=12908#p12908

Also look at the data in the likes of Barclays Equity Gilt Study 2016 Figure 7 that shows table values of inflation adjusted Equity Index and Income values since 1899. As of 2015 the income index still hasn't recovered, and hit lows of 14% of the 1900 income level (down 86%) [At around the same time the price value had dropped to 29% (down 71%) such that if you were forced to sell some stocks to provide 'income' due to low income levels, you'd have been selling low]. Did come close in 1996 when the income level was 99% of the 1900 level i.e. near the same income in inflation adjusted terms.

Inflation in 1900 was 3%, Treasury Bills paid 4%, so its not as though 1900 was particularly high (or low) based on such measures. By comparison with current low inflation, low interest rates (low yields), prices might be deemed to be relatively high given price/yield inverse correlation.

There was a price boom across the 1980's and 1990's, that tilt 'historic' measures that span perhaps just two or three decades back to look really good. Anticipation based on such limited historic data potentially will result in disappointment. There is even the risk of a worst case outcome compared to historic 100+ years given current valuation levels.

Might not happen, but could happen, and if it did happen then its best if you had "prepared for the worst, hope for the best" with 90% lower inflation adjusted stock value combined with 90% lower inflation dividend value in mind.

For those with state pensions or occupational index linked pensions, those might be considered as a form of bond or annuity. If they cover most of your basic disposable income needs then you more or less have the worst case covered and can go heavy into stocks with the rest. I believe for instance that TJH who posts detailed HYP reports has such 'bonds/annuity' basic living expenses type cover via pensions and hence his stock heavy portfolio is pretty well balanced when combined with owning a home/other sources of income. For others with no pension and maybe renting, then stock heavy/all-stock investment choice is too much risk/dependency upon such stocks alone.

When I looked at HYP from a total returns angle higher income (above average) came with lower capital growth where broadly overall the two compared. I'd suggest not considering HYP as being something 'special' but instead as something that is just 'good'. Its structure better ensures that you are less inclined to underperform the 'average', compared to many who do through poorer choice of structure. Many private investors relatively underperform the average through a combination of higher costs or poor structure - such as capitulating when things turned bad (selling low), buying when prices were high (euphoric). Buying high yield diversified in a somewhat equal weighted manner across a range of sectors is less inclined to buy-high. Direct share ownership on a pretty much buy and hold forever basis helps keep costs low ... etc. If you have a good pension and own your own home then HYP heavy is more acceptable, a form of bond, REIT and stock type overall asset allocation. If you've no pension and rent then HYP heavy could prove to have been a bad choice, and maybe adding a form of pension via annuities adds a degree of 'bond' like component to your overall asset allocation.

I'm a advocate of ancient Talmud advice of investment asset allocation of a third each in land (home), merchandise (stocks) and reserves (bonds). If you own a home you don't have to pay rent and you more or less have 'rent' liability matched (imputed rent benefit). If you have a decent pension then 'bonds' are pretty much covered. If you don't have 'bonds' covered then including actual bonds and/or a annuity is a appropriate choice for part of your overall asset allocation. If you don't have sufficient wealth to diversify in such a manner and achieve the desired level of retirement income, well then you might just have to take on the risk of stock heavy and hope that it works out; Or perhaps just divide what wealth you have across how many years remaining you believe you have and create a ladder of safe investments for such drawdown, accepting that heirs will only see a inheritance should your how-many-years-left estimate been over-estimated.

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

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.

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

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

Thanks also to OLTB and 1nv35t.

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.

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

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?

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.

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

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?

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.

tjh290633
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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

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

1nv35t
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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

Postby 1nv35t » December 8th, 2016, 7:05 pm

tjh290633 wrote: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%

That's similar to some extent to what you might see from a typical stock/bond allocation with a spend bonds first policy. Maybe initial 15 years of 'bonds' and 15 years of stocks x 12K/year or whatever for 180K in each of stocks and bonds (360K combined), but tending towards 180K+growth just in stocks after 15 years of having spent all of bonds (but more usually with some topping up of bonds along the way). But in your case where pensions are a synthetic non redeemable bond of sorts.

If stock accumulation grows at 5% real as per the historic average for the first 15 years whilst spending bonds then the value of the stock doubles in real terms such that you end the first 15 years with the same capital value in inflation adjusted terms as at the start. And providing bonds match inflation the first 15 years of income is inflation adjusted. A simple high street 5 year cash deposit bond ladder can serve well as the 'bond' asset choice. After 5 years that tends to average the average of the 5 year bond yield i.e. as maturing 1 year bond surplus amounts are rolled into a 5 year bond ...etc.

Similar to starting with 50/50 and ending with 100/0 stock/bonds, averaging 75/25, which is like having averaged into stocks over time (time diversification).

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

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?

Postby 1nv35t » December 8th, 2016, 10:27 pm

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.

Generally does seem a reasonable choice. However the inflation pacing is the big iffy. With interest rates so low, so much money having been printed globally, there is perhaps a risk that 50% or more of the purchase power (inflation adjusted) value could get wiped out, leaving you down at half sized pension. Then again you might achieve inflation beating returns, such that you could leave considerably more for heirs.

Stick. Or coin flip, heads half your pension, tails more for your heirs. Perhaps more of a loaded coin in favour of the latter, but if you've already planned for your heirs anyway, is that a gamble worth taking? I'm more inclined to stick. More so when you consider the counter side are prepared to provide such a option, which might mean they think the coin is more loaded against you and in their favour.

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

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

1nv35t wrote: I'm more inclined to stick. More so when you consider the counter side are prepared to provide such a option, which might mean they think the coin is more loaded against you and in their favour.


Thanks 1nv35t 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?

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

There was an article on Monevator recently

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

1nv35t
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Re: Is an Immediately Purchased HYP really a Replacement for an Immediate Annuity?

Postby 1nv35t » December 9th, 2016, 11:22 am

OLTB wrote:
1nv35t wrote: I'm more inclined to stick. More so when you consider the counter side are prepared to provide such a option, which might mean they think the coin is more loaded against you and in their favour.

Thanks 1nv35t 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.

In truth I don't know and would reasonably accept that trustees are under obligation to provide a transfer value. I personally hadn't even paid any attention, simply thinking that a inflation adjusted pension was a good thing to hold onto. But seeing two of you now posting around 35 x pension figures I'm tempted :)

I started work with the Post Office (telecommunications side) way back in the mid 1970's which is the source of my inflation linked pension (superannuation, which transferred over to British Telecom a few years after my joining, which then later privatised into BT). I left more than ten years ago (after having joined aged 16), taking a redundancy offer. I think my pension is projected to be around 14K/year and IIRC there's two years of that paid as a lump sum upon reaching the age of 60 when the pension starts to be paid (I've a few years left before then i.e. currently 56). Which might equate to close on £500K transfer value. Which is sorely tempting, more so as my lifestyle and family history is perhaps indicative that I might be lucky to see age 80 before checking out. In which case 20 years of 25K/year potential drawdown rate instead of 14K/year pension (assuming a 'safe' asset allocation and simple drawdown approach). Or 20K/year more immediate pension start (56 to 80). That is tempting, but blindly I know little about the detail of how to go about such transfer or the options either (must it be into a SIPP or whatever). Certainly going to investigate further. Thanks.

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

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?

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

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

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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