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Annuity, cash, bonds or investment for 77 year old?

Including Financial Independence and Retiring Early (FIRE)
Kantwebefriends
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Re: Annuity, cash, bonds or investment for 77 year old?

#499548

Postby Kantwebefriends » May 10th, 2022, 12:05 am

TahiPanasDua wrote:It is always assumed that an annuity is one of the safest possible investments you can make. That may be true. However, is there any protection if your, say, insurance company providing the annuity goes bust? 2


My amateur understanding is that there is great protection for such insurers and that people just don't lose on simple annuities. (In the UK: I gather it's riskier in the US.) But if you were to buy a "fancy" With Profits annuity then you can be disappointed by the results, as happened to W/P annuitants at Equitable Life.

I have a cousin with a W/P annuity: it can sink in payment from one year to the next but there is a guaranteed "collar" below which it won't sink. I believe (and so does he, and his advisor) that it's safe as houses. I assume that the poor sods at Equitable Life had no such guarantee.

I'm open to correction though.

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Re: Annuity, cash, bonds or investment for 77 year old?

#499551

Postby Kantwebefriends » May 10th, 2022, 12:25 am

Dod101 wrote:Incidentally, I think that suspending the State pension for a 77 year old is a non starter, especially for a risk averse one! I am about the same age, and I would not do that.Dod


All that means is that you are averse to "regret" - the feeling that if, say, you suspended the pension for three years and died after only seven you'd kick yourself. (Insofar as a corpse can.)

But be rational. If the old girl is averse to the thought of running out of income, use the calculator and assign her a further 23 years of life. If she's fearful of inflation, then enter real interest rates as (-7%) i.e. 3% on cash minus 10% inflation. The calculator says it's rational to suspend the pension for 10 years.

I wouldn't but that's because I assume a real interest rate of (-7%) is unlikely to last for 23 years, however long Mum lasts.

So I try again: give her (and high inflation) a 13 year span. Then the calculator recommends a three- and-a-half year suspension. Give them both ten years and it recommends one year and eight months.

Anyway, if she is averse to inflation and would like an index-linked annuity, that's one way to get her one. Do you have a better one up your sleeve?

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Re: Annuity, cash, bonds or investment for 77 year old?

#499552

Postby Kantwebefriends » May 10th, 2022, 12:44 am

As for a Purchased Life Annuity, I doubt if there's a good case for plunging £300,000 into one. You could put, say, £75k into one, expecting that interest rates will rise and she might buy another in a few years time - perhaps from a different insurer just to diversify risk (however tiny that risk might be). Or even wait a bit in hope that interest rates will now rise faster than inflation, if that's a gamble you feel is justified.

Remember that if you go shopping for a PLA she'll get a higher one if her health is poor and if she smokes. If she gets a medical and is rated fit as a flea then you could indeed consider pension deferral.

But for a worrier the rational answer - which might be quite irrelevant - is to diversify: a bit of equities and commodities, a bit of extra state pension, a lump of PLA, a little bit of gold, some Premium Bonds, ... The trouble with that is it gives her a whole list of things to worry about.

As someone observed earlier, the key question is which risks is she averse to?

P.S. The ONS calculator gives a (median? average?) 77 year old woman a life expectancy of 13 years.

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Re: Annuity, cash, bonds or investment for 77 year old?

#499553

Postby Kantwebefriends » May 10th, 2022, 12:50 am

Kantwebefriends wrote:The ONS calculator gives a (median? average?) 77 year old woman a life expectancy of 13 years.
i.e. to age 90.

I've found a subsequent ONS calculator. It gives 89, with a 25% chance of 94, 10% of 98, and 5% of 100. In vaccinated, boosted world, Lord knows how useful such estimates might be.

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Re: Annuity, cash, bonds or investment for 77 year old?

#499562

Postby Wuffle » May 10th, 2022, 7:25 am

The human brain does some unhelpful things to the neuro-typical.
Fortunately I am not burdened in that way.

Her chances of making 89 are 50-50.
Most of her friends will have gone if she hangs on to 94 and her kids might be thinning out if she gets to 98 or 100.
My dad went at 76 a few years ago.
But you only ever see the stats written the other way.

W.

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Re: Annuity, cash, bonds or investment for 77 year old?

#499565

Postby Dod101 » May 10th, 2022, 7:34 am

Kantwebefriends wrote:
Dod101 wrote:Incidentally, I think that suspending the State pension for a 77 year old is a non starter, especially for a risk averse one! I am about the same age, and I would not do that.Dod


All that means is that you are averse to "regret" - the feeling that if, say, you suspended the pension for three years and died after only seven you'd kick yourself. (Insofar as a corpse can.)

But be rational. If the old girl is averse to the thought of running out of income, use the calculator and assign her a further 23 years of life. If she's fearful of inflation, then enter real interest rates as (-7%) i.e. 3% on cash minus 10% inflation. The calculator says it's rational to suspend the pension for 10 years.

I wouldn't but that's because I assume a real interest rate of (-7%) is unlikely to last for 23 years, however long Mum lasts.

So I try again: give her (and high inflation) a 13 year span. Then the calculator recommends a three- and-a-half year suspension. Give them both ten years and it recommends one year and eight months.

Anyway, if she is averse to inflation and would like an index-linked annuity, that's one way to get her one. Do you have a better one up your sleeve?


Were I the son, I would object to my mother being referred to as 'the old girl' but setting that aside, I doubt very much that she or her son are going to be quite as analytical as you are trying to be. I have given my opinion and so have you. I expect the OP now has enough views to be able to help his mother to do what they feel is the right thing for them.

Dod

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Re: Annuity, cash, bonds or investment for 77 year old?

#499576

Postby TahiPanasDua » May 10th, 2022, 8:24 am

Kantwebefriends wrote:
TahiPanasDua wrote:It is always assumed that an annuity is one of the safest possible investments you can make. That may be true. However, is there any protection if your, say, insurance company providing the annuity goes bust? 2


My amateur understanding is that there is great protection for such insurers and that people just don't lose on simple annuities. (In the UK: I gather it's riskier in the US.) But if you were to buy a "fancy" With Profits annuity then you can be disappointed by the results, as happened to W/P annuitants at Equitable Life.

I have a cousin with a W/P annuity: it can sink in payment from one year to the next but there is a guaranteed "collar" below which it won't sink. I believe (and so does he, and his advisor) that it's safe as houses. I assume that the poor sods at Equitable Life had no such guarantee.

I'm open to correction though.


Thanks KWBF.

As I said above "please excuse my ignorance....". Such ignorance was confirmed when I subsequently read that the government will pay 90% of an annuity in the event of the collapse of the provider. That provides a high level of comfort but I would guess that, as you suggest, any bells and whistles above the basic annuity would be excluded. That last proviso, however, is just yet another uninformed guess on my part.

TP2

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Re: Annuity, cash, bonds or investment for 77 year old?

#499638

Postby Kantwebefriends » May 10th, 2022, 1:27 pm

TahiPanasDua wrote: I subsequently read that the government will pay 90% of an annuity in the event of the collapse of the provider.


The same firms tend to sell life insurance - which is actually death insurance - and annuities - which are actually longevity insurance. So if, say, the Black Death struck again, the insurers would pay out heavily to the widows and children of life insurance purchasers who died, but would save a bomb on the annuity outflows cut short.

Therefore the collapse of a provider should be unlikely. That assumes a combination of competence, honesty, and prudence. In my experience actuaries are clever fellows - I hope the big bosses at insurers pay due attention to their calculations.

I'm mildly surprised that nobody seems yet to have published anything much on the corresponding effects of Covid/lockdowns/vaccines. For example, Covid has overwhelmingly killed the very old and ill. So it probably hasn't shortened annuity payment periods much. For conspicuous deaths the vaccines have disproportionately killed young males. But many of them will have been too young to have bought life insurance.

But if the vaccines have also been killing middle-aged people then they will have been killing people with quite a bit of life insurance. It'll be interesting to see how it all shakes down. The Life Insurers must already have quite a bit of evidence: that they can predict the next decade well must be doubtful though.

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Re: Annuity, cash, bonds or investment for 77 year old?

#500336

Postby Dod101 » May 13th, 2022, 7:59 pm

Kantwebefriends wrote:
TahiPanasDua wrote: I subsequently read that the government will pay 90% of an annuity in the event of the collapse of the provider.


The same firms tend to sell life insurance - which is actually death insurance - and annuities - which are actually longevity insurance. So if, say, the Black Death struck again, the insurers would pay out heavily to the widows and children of life insurance purchasers who died, but would save a bomb on the annuity outflows cut short.

Therefore the collapse of a provider should be unlikely. That assumes a combination of competence, honesty, and prudence. In my experience actuaries are clever fellows - I hope the big bosses at insurers pay due attention to their calculations.

I'm mildly surprised that nobody seems yet to have published anything much on the corresponding effects of Covid/lockdowns/vaccines. For example, Covid has overwhelmingly killed the very old and ill. So it probably hasn't shortened annuity payment periods much. For conspicuous deaths the vaccines have disproportionately killed young males. But many of them will have been too young to have bought life insurance.

But if the vaccines have also been killing middle-aged people then they will have been killing people with quite a bit of life insurance. It'll be interesting to see how it all shakes down. The Life Insurers must already have quite a bit of evidence: that they can predict the next decade well must be doubtful though.


It is only of course excess deaths that will be of concern to the insurers.

Dod

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Re: Annuity, cash, bonds or investment for 77 year old?

#500353

Postby Alaric » May 13th, 2022, 9:41 pm

TahiPanasDua wrote: Such ignorance was confirmed when I subsequently read that the government will pay 90% of an annuity in the event of the collapse of the provider. That provides a high level of comfort but I would guess that, as you suggest, any bells and whistles above the basic annuity would be excluded. That last proviso, however, is just yet another uninformed guess on my part.


It's 100% for annuities where there isn't any part of the annuity payment conditional on investment performance.


An explanatory document by one of the providers.

https://documents.canadalife.co.uk/poli ... ection.pdf

Equitable's smoke and mirrors was that only part of this year's annuity payment was guaranteed to also be payable next year. The rest was conditional on investment performance and a lack of disasters in other parts of the business.


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