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Risking an annuity?

Including Financial Independence and Retiring Early (FIRE)
Gilgongo
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Risking an annuity?

#610783

Postby Gilgongo » August 24th, 2023, 11:55 am

Until a few months ago, I'd not considered annuities at all as part of my retirement (I'm 56), which I plan to start in April. But I see rates are at a 14 year high.

There isn't much discussion of annuities on these boards, but is anyone else thinking about them?

DrFfybes
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Re: Risking an annuity?

#610799

Postby DrFfybes » August 24th, 2023, 1:24 pm

Interesting thread title, I'd consider an annuity as the opposite of risk :)

We have a couple of DB pensions, which cover our Basic outgoings, plus a bit.

These can be considered in many ways as part of the strategy, perhaps instead of cash, or bonds, but whatever the thought process it means we are very flexible about our investments, can afford to take a bit more risk, and most importantly should things come crashing down can reign in the discretionary spending.

Consequently apart from cash to cover the building works (including some premium bonds) we are pretty much 100% equities.

Peolpe are comfortable with different level of risk, but I have to say that a (pretty much) guaranteed index linked basic income to cover the household bills is ery very comforting.

Paul

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Re: Risking an annuity?

#610809

Postby Tedx » August 24th, 2023, 2:01 pm

The problem for me is that the choices have to be made at the outset and can't be changed.

Last time I looked at annuities, index linked annuites started from a much lower level than fixed annuities - in fact thay took about 18 years to catch up just to pay the same amount + plus you have to add in all the lost income from starting at the lower level. This could be a problem if inflation stays low over the coming years.

Of course taking a fixed annuity could backfire if inflation continues to be a problem.

Then there's always the question of a spouses pension. If you 'buy' a spouses pension and he/she dies soon after, you still have to pay for it for the rest of your days. And after your spouse, they generally die with the annuitant.

I appreciate that there are various hybrids of the standard annuity these days

.....And you have to give up the money in return for the annuity. Which would hurt.

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Re: Risking an annuity?

#610838

Postby UncleEbenezer » August 24th, 2023, 9:59 pm

DrFfybes wrote:Interesting thread title, I'd consider an annuity as the opposite of risk :)

I wouldn't.

It's not just about the government of the day's attitude to bailouts when annuity providers start going bust. The circumstance that lead to the bust may make it impossible for government to bail victims out. Doubly so if inflation is still a politically-important issue at the time!

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Re: Risking an annuity?

#610846

Postby Dod101 » August 24th, 2023, 10:06 pm

UncleEbenezer wrote:
DrFfybes wrote:Interesting thread title, I'd consider an annuity as the opposite of risk :)

I wouldn't.

It's not just about the government of the day's attitude to bailouts when annuity providers start going bust. The circumstance that lead to the bust may make it impossible for government to bail victims out. Doubly so if inflation is still a politically-important issue at the time!


Why do you assume that annuity providers will go bust? And even if they do these days that does not seem to matter. The State will bail us out.

Dod

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Re: Risking an annuity?

#610855

Postby UncleEbenezer » August 24th, 2023, 10:19 pm

Dod101 wrote:
UncleEbenezer wrote:I wouldn't.

It's not just about the government of the day's attitude to bailouts when annuity providers start going bust. The circumstance that lead to the bust may make it impossible for government to bail victims out. Doubly so if inflation is still a politically-important issue at the time!


Why do you assume that annuity providers will go bust? And even if they do these days that does not seem to matter. The State will bail us out.

Dod

When their underlying assets take a tumble. One that's had a certain amount of media attention in recent (since the 2009 crash) years is housing assets with aggressively-optimistic assumptions of perpetual house price inflation.

As for bailouts, that seems to be politically cyclical. Neither BCCI nor Barings was bailed out in the 1990s. Nor - in the pensions business - was the Equitable! Rising interest rates and concern over inflation might very well herald the turning of that political cycle.

p.s. Perhaps I should add, I was someone who deliberately forewent the best interest rates around 2005 (when I came out of poverty and had money to save), because I failed to foresee that the government of the day would bail out everyone - even Icesave - when they went bust.

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Re: Risking an annuity?

#610869

Postby tjh290633 » August 24th, 2023, 10:40 pm

Tedx wrote:Last time I looked at annuities, index linked annuites started from a much lower level than fixed annuities - in fact thay took about 18 years to catch up just to pay the same amount + plus you have to add in all the lost income from starting at the lower level. This could be a problem if inflation stays low over the coming years.

Of course taking a fixed annuity could backfire if inflation continues to be a problem.

Then there's always the question of a spouses pension. If you 'buy' a spouses pension and he/she dies soon after, you still have to pay for it for the rest of your days. And after your spouse, they generally die with the annuitant.

I appreciate that there are various hybrids of the standard annuity these days

.....And you have to give up the money in return for the annuity. Which would hurt.

I retired in 1998. At that time the best rates for annuities were:

.                    Single Life   Joint Lives
Level 909.00 797.86
5% escalating 646.00 448.00
Index-linked 740.00 570.76


I kept records of the progression. In terms of the annuity paid, the 5% esalating annuity caught up with the level anuity in 2010, while the indeed annuity maded it in 2011. In terms of total amount received, that became higher in 2020 and 20022 respectively. The limit of 5% on index linking has an effect. You never recover what is lost that way.

TJH

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Re: Risking an annuity?

#610870

Postby Alaric » August 24th, 2023, 10:41 pm

UncleEbenezer wrote:When their underlying assets take a tumble.


There are quite a number of layers of protection for annuities. Underlying assets would be bonds and provided the coupons were closely matched to the annuity outgo and thet they weren't cancelled, market value fluctuations don't have any effect.

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Re: Risking an annuity?

#610884

Postby UncleEbenezer » August 24th, 2023, 11:00 pm

tjh290633 wrote:I retired in 1998. At that time the best rates for annuities were:

.                    Single Life   Joint Lives
Level 909.00 797.86
5% escalating 646.00 448.00
Index-linked 740.00 570.76


I kept records of the progression. In terms of the annuity paid, the 5% esalating annuity caught up with the level anuity in 2010, while the indeed annuity maded it in 2011. In terms of total amount received, that became higher in 2020 and 20022 respectively. The limit of 5% on index linking has an effect. You never recover what is lost that way.

TJH


Kudos for keeping that kind of records! Your timing was pretty-much ideal (though I guess that might be an accident of age): 1998 was just before the Equitable bust that heralded the (inevitable) generational decline.

Looking at H-L's rates, I see we're back up closer to your rates than I'd envisaged happening again in my life (at least, of an age to buy an annuity). Your £740 has become £460, so just 38% down! Albeit with higher risk than your generation faced.

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Re: Risking an annuity?

#610888

Postby UncleEbenezer » August 24th, 2023, 11:06 pm

Alaric wrote:
UncleEbenezer wrote:When their underlying assets take a tumble.


There are quite a number of layers of protection for annuities. Underlying assets would be bonds and provided the coupons were closely matched to the annuity outgo and thet they weren't cancelled, market value fluctuations don't have any effect.

Don't take my word for it. See for example https://www.bis.org/review/r180511d.pdf

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Re: Risking an annuity?

#610939

Postby Dod101 » August 25th, 2023, 7:50 am

The question was 'Risking an annuity?' The biggest risk is another Equitable Life. Fortunately that does not happen very often and for some reason the usual checks and balances were missing there. It can happen and annuities are often handling people's life savings or a good deal of them anyway so there are safeguards built in to the system, but I am not entirely clear what risks the OP had in mind.

Get your timing right and it may prove a great buy. It is quite possible that we are nearing the top of the interest rate cycle and so annuity rates are probably close to as good as they are going to get. Getting the best rates at the time of purchase is very important as you only get one chance but at the same time, the security of the provider is also important; the average buyer will need the provider to be around for the next 30 years or so.

Dod

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Re: Risking an annuity?

#610977

Postby 1nvest » August 25th, 2023, 9:10 am

Gilgongo wrote:Until a few months ago, I'd not considered annuities at all as part of my retirement (I'm 56), which I plan to start in April. But I see rates are at a 14 year high.

There isn't much discussion of annuities on these boards, but is anyone else thinking about them?

When I did a rough calculation just a few days ago, for a inflation adjusted ladder versus inflation adjusted annuity and the (Index Linked Gilt) ladder came out ahead. Gilts are fully guaranteed (annuity provider could go broke). And a potential big plus is that the ladder can be near tax-free income if you opt for low yields (most of returns are via price appreciation/capital gains, that for Gilts are tax exempt, whilst the taxable income on 0.125% yield gilts are near insignificant).

The annuity is for life, the ladder is for however many years you fix that to be, but you could drop the tax savings amount into a stock fund to provide some degree of longevity cover, as might you run a separate stock accumulation portfolio with 'surplus' amounts for such purpose. If you die earlier than expected then the ladder has the value still available for heirs. Annuity payments are more regular, with a ladder you have to do additional cash-flow management (the UK index linked gilt date range is relatively shallow, so in some cases you may have a couple of years between the next rung (Gilt) maturing).

Looks to me that annuities continue to only potentially be better with age. Defer the purchase until perhaps 75 or 80, when if still in good health you might be looking more towards longevity factors.

Level annuities or some growth look appealing at the start, but can end up having permanently lost out. Inflationary periods are inclined to present as more extreme spikes, and are more often also accompanied by taxation spikes.

Looking at https://www.yieldgimp.com/index-linked-gilt-yields and the real yields column suggests a by-eye recent broad (across 1 to 30 year gilt) yield of around 1%, so for a 30 year ladder paying £10K/year inflation adjusted would cost around £258K. Assuming 0.125% yielding gilts being held for each rung and the income tax bill would be less than £100/year (close to £75/year) for a basic rate taxpayer. For a annuity that also paid a £9925/year net amount, where income was taxed at 20%, you'd require a £12,400 payout rate. Imprecise - but indicative back of napkin calculation ... you get the idea. Which might be even more relevant if otherwise the annuity income pushes other sources of income into a higher rate tax band that otherwise with a ladder might have remained in the basic rate tax band.

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Re: Risking an annuity?

#611016

Postby DrFfybes » August 25th, 2023, 10:27 am

UncleEbenezer wrote:
DrFfybes wrote:Interesting thread title, I'd consider an annuity as the opposite of risk :)

I wouldn't.

It's not just about the government of the day's attitude to bailouts when annuity providers start going bust. The circumstance that lead to the bust may make it impossible for government to bail victims out. Doubly so if inflation is still a politically-important issue at the time!


If the Global Economy gets to the stage when Annuity providers go bust, I can't see those self managing being in a better position.

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Re: Risking an annuity?

#611019

Postby UncleEbenezer » August 25th, 2023, 10:43 am

DrFfybes wrote:
UncleEbenezer wrote:I wouldn't.

It's not just about the government of the day's attitude to bailouts when annuity providers start going bust. The circumstance that lead to the bust may make it impossible for government to bail victims out. Doubly so if inflation is still a politically-important issue at the time!


If the Global Economy gets to the stage when Annuity providers go bust, I can't see those self managing being in a better position.

Who was in the better position when the Equitable went bust? Not people like me, who paid no attention to pensions (or other financial products more sophisticated than a savings account), but invested with the Equitable to get the SERPS discount on my tax rate.

Agreed, many other assets will be in trouble, and with them yours and my portfolios - among many others. But mine will be more diversified than an annuity is allowed to be. And - probably much more importantly, I'll still be in charge. Psychologically I think it's better to be in the driving seat and in charge when you have a scarily-near miss than helpless in the passenger seat!

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Re: Risking an annuity?

#611031

Postby EthicsGradient » August 25th, 2023, 11:14 am

UncleEbenezer wrote:
DrFfybes wrote:
If the Global Economy gets to the stage when Annuity providers go bust, I can't see those self managing being in a better position.

Who was in the better position when the Equitable went bust? Not people like me, who paid no attention to pensions (or other financial products more sophisticated than a savings account), but invested with the Equitable to get the SERPS discount on my tax rate.

Agreed, many other assets will be in trouble, and with them yours and my portfolios - among many others. But mine will be more diversified than an annuity is allowed to be. And - probably much more importantly, I'll still be in charge. Psychologically I think it's better to be in the driving seat and in charge when you have a scarily-near miss than helpless in the passenger seat!

The people in the best position were those with the guarantees that Equitable had unwisely made. They got large payouts, which left not enough for everyone else. But:

Pension provider failures
Generally, FSCS can protect pensions that are provided by UK-regulated insurers, as long as they qualify as ‘contracts of long-term insurance’. A common example is an annuity, where you exchange the cash in your pension for a regular income from an insurance company.

Where FSCS can pay compensation, we will cover the pension at 100% with no upper cap. We cannot confirm whether individual plans with specific providers would be classed as 'contracts of long-term insurance' or not – you would need to speak to your provider directly.

https://www.fscs.org.uk/what-we-cover/pensions/

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Re: Risking an annuity?

#611041

Postby Alaric » August 25th, 2023, 11:51 am

EthicsGradient wrote:Who was in the better position when the Equitable went bust?


Those who took out fixed annuities (fixed as in not subject to Equitable's financial performance) continued to receive their payments as normal. Eventually a deal was done to transfer them to Canada Life as I think it was.

Equitable didn't slightly speaking go bust, but it did have to drastically scale back all the unwise promises it had made based on supposed future investment profits,

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Re: Risking an annuity?

#611205

Postby hiriskpaul » August 25th, 2023, 9:08 pm

Something I have been thinking about for a while.

A few points worth considering:

- annuities don't have to be all or nothing investments. ie, nothing to stop you buying an annuity with part of your SIPP.

- annuities don't have to be for life. You could for example go for a 10-15 year one and hope your other investments rise over that period. This may be a good way to mitigate sequence of return risk.

- multiple annuities can be purchased over time. Buying a series of annuities, possibly of differing types, over a number of years mitigates the risk of bad timing.

-pertinent at present is the fact that the LTA charge is zero. Next year the LTA is due to be abolished, but Labour are promising to bring it back. For those affected, now may be an opportune time to buy an annuity without paying an LTA charge.

- I believe that it is possible to buy deferred annuities. That might mesh well with the abolished, probably temporarily abolished LTA charge.

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Re: Risking an annuity?

#611231

Postby Wuffle » August 26th, 2023, 5:36 am

Haven't we all already got one?
And as a relatively low earner, mine was cheap.

W.

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Re: Risking an annuity?

#611244

Postby Gilgongo » August 26th, 2023, 8:08 am

1nvest wrote:When I did a rough calculation just a few days ago, for a inflation adjusted ladder versus inflation adjusted annuity and the (Index Linked Gilt) ladder came out ahead.


How big was the difference? I find bonds hard to understand, let alone manage in a ladder. So I would count that as a "cost" in my old age compared to a "buy-and-forget" annuity (which of course I could buy in stages).

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Re: Risking an annuity?

#611268

Postby DrFfybes » August 26th, 2023, 9:19 am

hiriskpaul wrote:Something I have been thinking about for a while.

A few points worth considering:

- annuities don't have to be all or nothing investments. ie, nothing to stop you buying an annuity with part of your SIPP.

- annuities don't have to be for life. You could for example go for a 10-15 year one and hope your other investments rise over that period. This may be a good way to mitigate sequence of return risk.

- multiple annuities can be purchased over time. Buying a series of annuities, possibly of differing types, over a number of years mitigates the risk of bad timing.


All good considerations, I got the impression the OP was looking at only using part of their SIPP.

Probably an opportune time to mention I have my own option 2 on the list. An unsheltered account invested in a Global Fund that automatically sells a fixed sum each month and puts the money in my bank. You could put (say) £100k in and take £800/month and take the risk it lasts you the 10 years until State Pension. Just make sure it is an Income fund for tax calcs down the line :)

Gilgongo wrote:Until a few months ago, I'd not considered annuities at all as part of my retirement (I'm 56), which I plan to start in April.

Wuffle wrote:Haven't we all already got one?
And as a relatively low earner, mine was cheap.


I think the OP wants something in the interim :)

Paul


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