Annuities

[swill453]

My daughter, an actuary, pointed me at this white paper "Annuities Reinvented", which makes a case for having an annuity as part of a drawdown strategy.

http://uk.milliman.com/annuities-reinvented/

To me it seems a bit of a desperate last gasp, and not really relevant to me (retired 5 years ago at 53, 100% equities + big cash buffer, happy with risk of running out of money).

Scott.

[Urbandreamer]

To me it seems a bit of a desperate last gasp, and not really relevant to me (retired 5 years ago at 53, 100% equities + big cash buffer, happy with risk of running out of money).

Scott.

Not relevent to you apparently, but I stongly disagree with the desperate last gasp bit.

I too am unlikely to ever want an annuity. I hope that my children won't. I believe that my wife doesn't. But EVERYONE?

I haven't made it past the opening part of the pdf yet, but it's already using phrases that should resound in the ears of anyone who considers portfolio theory. It's pure CAPM.

To me the huge issue with annuities was that they were a BAD deal dictated by the government. Indeed the pdf just about admits that fact. Because they were dictated there was no need for them to try to offer a good deal. For those who don't know private pensions HAD to be spent on an annuity, while company pensions were paid "by the company", though in fact by the pension scheme.

So on the one hand, we have the people who want certainty, the other we have those who realy dislike volatility. Given that market, I can quite see annuities continuing.

Scott, even if you have no intention of buying an annuity or changing your ways, please look up CAPM and study the theory. Feel free to reject it as not for you (I have for me), but it is important to know what you have chosen to reject. Arguably annueties can take the place of bonds or government debt in CAPM.

PS. I believe that William Sharpe was given a nobel prize for CAPM in 1990.

[supremetwo]

My daughter, an actuary, pointed me at this white paper "Annuities Reinvented", which makes a case for having an annuity as part of a drawdown strategy.
http://uk.milliman.com/annuities-reinvented/
To me it seems a bit of a desperate last gasp, and not really relevant to me (retired 5 years ago at 53, 100% equities + big cash buffer, happy with risk of running out of money).Scott.

!6th March 2019 article :- https://www.theguardian.com/money/2019/ ... ity-to-buy
The pension companies based their annuity rates on projections of how long people at 65 were likely to survive. But they got their projections wrong: it turns out we are not living as long as expected. Just last week the actuaries clipped six months off projected life expectancy, with the projections now 13 months lower than in 2015.

What it means is that the pension companies won’t have to pay out as much annuity money as they originally provided for (and charged people for). Rather than handing it back to these it overcharged, locked-in pensioners, the industry is handing it to shareholders.
Last week Aviva “released” £780m of cash that had been set aside to pay annuities.
M&G Prudential released another £441m – 27% of its operating profit.
Legal & General found £433m, while Phoenix chipped in another £205m.

Article goes on to say that the dividend yield on Aviva shares is better than their annuity offering.

[Steveam]

I’ve only read the beginning but it already makes a point which I think is often overlooked: with annuities one doesn’t need to over provision for one’s retirement. I’m, fortunately, in a position where over provisioning isn’t a problem: there will almost certainly be quite a lot left when I pop my clogs but I’ve several friends for whom certainty or some degree of certainty regarding income is an enabler. Given the certainty of an annuity there is no or less need to hold back funds.

Although I can afford to have a fairly relaxed attitude to income certainty I’m actually building up an index linked pension income by deferring my state pension. If I defer for quite a long time I’m unlikely to live long enough to maximise the benefit but I’ll remove any risk of running out of money in old age! (If I defer until aged 90 I’ll be getting over £75k per annum of state pension in today’s money. This is, of course, subject to political risk).

Best wishes,

Steve

[gryffron]

Arguably annueties can take the place of bonds or government debt in CAPM.

Surely annuities are just goverment debt - with a very expensive management charge.

Gryff

[Urbandreamer]

Arguably annueties can take the place of bonds or government debt in CAPM.

Surely annuities are just goverment debt - with a very expensive management charge.

Gryff

I would be interested in you proving that statement. I know that I couldn't.

However if they are constructed of government debt, a managed bond fund using corporate debt or indeed provided by a mix of equity and fixed interest securities held by the insurer, it doesn't change the argument put forward in the original link.

[Hariseldon58]

There is a whole chapter on guaranteed income , including annuities, in the excellent book, "Living Off Your Money", by McClung

The idea, with US data, is explored in exhaustive detail, with a lot of data crunching and covers many reasons why and how. The use of annuities is not personally, but an element could be a good idea for many.

(It is an outstanding book on the subject, well worth the £28)

[UncleEbenezer]

Article goes on to say that the dividend yield on Aviva shares is better than their annuity offering.

Could that be a cyclical asset in an upswing? I really wouldn't want a pyad-sized holding in my pension provision!

In principle, the security of an annuity has some attraction. In practice, who can tell how the government of the day will react when an annuity provider goes bust? Particularly since the circumstances of that happening might well be correlated with the government itself being in more serious financial trouble than we've seen since at least the 1970s.

I might still get one, if someone were to offer me a sufficiently enhanced rate without obvious enhanced risk.

[Dod101]

Article goes on to say that the dividend yield on Aviva shares is better than their annuity offering.

All that that shows is that their actuaries see their annuity as better secured than the dividend on Aviva shares. I agree with that, but it proves nothing.

Dod

[hiriskpaul]

My daughter, an actuary, pointed me at this white paper "Annuities Reinvented", which makes a case for having an annuity as part of a drawdown strategy.

http://uk.milliman.com/annuities-reinvented/

To me it seems a bit of a desperate last gasp, and not really relevant to me (retired 5 years ago at 53, 100% equities + big cash buffer, happy with risk of running out of money).

Scott.

Looking through the paper, it seems to me that the authors have simply re-affirmed the fact that the value of an annuity increases with the longevity of the annuitant. Essentially there is a transfer of value from those who fail to reach their life expectancy to those who exceed it.

The return from an annuity for someone who lives to 100+ would be expected to be better than that from a bond portfolio with duration matched to life expectancy.

I guess a conclusion that may be reached is that it does not appear to be the case that annuity providers are ripping off their customers, assuming the annuity quotes were reasonable market values and the stochastic model the authors used was not total bunkum.

[Steveam]

Thx hiriskpaul - a nice way of looking at it.

From an individual PoV the annuity has an element of insurance against longevity risk.

Best wishes,

Steve

[Alaric]

From an individual PoV the annuity has an element of insurance against longevity risk.

The argument is that in recent years, the entry price for annuities overcharged a bit. A consequence being that shareholders, particularly Legal & General ones, are benefiting. In the case of Legal & General much of it is a transfer of wealth within the business sector, since a lot of their annuity business is buy outs from the sponsors of defined benefit schemes wishing to cut their risks.

Notwithstanding the muddled press comment, it does still seem as if longevity is improving. Whilst the generation born in 1950 who are still with us is still expected to live to an average greater age than those born in 1945, the difference between 1950 and 1945 isn't so pronounced as between 1945 and 1940. Or something like that.