Uk: any advice on annuities?

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steve321
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Uk: any advice on annuities?

Post by steve321 »

I was just wondering about annuities, I never gave the subject much thought in the past but I now see that one advantage would be that when you are elderly and perhaps you find it hard to manage your finances, you would have a steady stream of income without needing to do anything.
One thing that bothers me is that as far as I have seen the sum they give you will not normally be inflation adjusted. Is that correct and if so do you know of annuities that will be adjusted for inflation? Also, is there anything else I should be aware of and watch out for?
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde
grok87
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Re: Uk: any advice on annuities?

Post by grok87 »

steve321 wrote: Mon Jun 07, 2021 6:09 am I was just wondering about annuities, I never gave the subject much thought in the past but I now see that one advantage would be that when you are elderly and perhaps you find it hard to manage your finances, you would have a steady stream of income without needing to do anything.
One thing that bothers me is that as far as I have seen the sum they give you will not normally be inflation adjusted. Is that correct and if so do you know of annuities that will be adjusted for inflation? Also, is there anything else I should be aware of and watch out for?
this site suggests that they are available
https://www.ageuk.org.uk/information-ad ... annuities/
is that not true anymore?
cheers,
grok
RIP Mr. Bogle.
Valuethinker
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Re: Uk: any advice on annuities?

Post by Valuethinker »

steve321 wrote: Mon Jun 07, 2021 6:09 am I was just wondering about annuities, I never gave the subject much thought in the past but I now see that one advantage would be that when you are elderly and perhaps you find it hard to manage your finances, you would have a steady stream of income without needing to do anything.
One thing that bothers me is that as far as I have seen the sum they give you will not normally be inflation adjusted. Is that correct and if so do you know of annuities that will be adjusted for inflation? Also, is there anything else I should be aware of and watch out for?
If you check the personal finances pages of your weekend newspaper (FT in my case) they will show quotes for annuities both inflation indexed and not.

Just about every insurer offers both. Because the "crossover point" where the inflation indexed annuity payment exceeds the straight annuity is typically around 18 years right now (if, big if, you assume inflation is what the market thinks it will be) most people these days probably opt for the higher, fixed payment. i.e. £100k might buy you £4,300 of fixed annuity, but only £1,900 of inflation indexed (65 year old man, 60 year old spouse w survivor benefit)-- I may be out of date on my quotes.

(often called an "index linked" annuity).

Note that any Defined Benefit pension scheme in the UK is an inflation indexed annuity: usually RPI indexed, 50% at least spousal survivor benefit.

RPI is currently about +1% above CPI so it matters to which you are indexed. However post 2030, the Chancellor has announced the 2 inflation series will have the same number (Ie the CPIH number).
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Re: Uk: any advice on annuities?

Post by Valuethinker »

grok87 wrote: Mon Jun 07, 2021 6:18 am
steve321 wrote: Mon Jun 07, 2021 6:09 am I was just wondering about annuities, I never gave the subject much thought in the past but I now see that one advantage would be that when you are elderly and perhaps you find it hard to manage your finances, you would have a steady stream of income without needing to do anything.
One thing that bothers me is that as far as I have seen the sum they give you will not normally be inflation adjusted. Is that correct and if so do you know of annuities that will be adjusted for inflation? Also, is there anything else I should be aware of and watch out for?
this site suggests that they are available
https://www.ageuk.org.uk/information-ad ... annuities/
is that not true anymore?
cheers,
grok
Essentially every insurer offers both. However the UK index linked gilt (TIPS) is yielding -2.5% (yes, minus) right now, so therefore the annuity rates don't look attractive to most people.

Most of us don't carry a good intuition in our heads of what 20 years out means, in terms of inflated prices and diminished buying power, and many of us at 65 probably reckon (incorrectly) that we are not likely to care.

The state pension in the UK is quite low compared to US Social Security or the Continental European state pensions, say. Most people struggle to factor that in.

I had a colleague who retired at 60. She had 2 of the old fashioned final salary schemes from banks she had worked at in the 1980s & early 90s. Last of a breed that -- unless you happen to be a civil servant (and the new civil service scheme is Career Average Salary, starts at the state pension age (67 and could be increased), and is significantly less generous).
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Re: Uk: any advice on annuities?

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ok thanks for your feedback; I only just got curious about this today (I have always liked to have more control on things but it occurred to me that as one ages they might no longer want to (or be able to) manage their wealth). So today I ended up on a pae doing online comparisons, which did not offer inflation linked once - hence my question. Will look into it more closely. Cheers
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde
grok87
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Re: Uk: any advice on annuities?

Post by grok87 »

steve321 wrote: Mon Jun 07, 2021 9:05 am ok thanks for your feedback; I only just got curious about this today (I have always liked to have more control on things but it occurred to me that as one ages they might no longer want to (or be able to) manage their wealth). So today I ended up on a pae doing online comparisons, which did not offer inflation linked once - hence my question. Will look into it more closely. Cheers
it woudl be great, steve, if you could post any info that you find after you look into it more closely...
cheers
grok
RIP Mr. Bogle.
steveyg50
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Re: Uk: any advice on annuities?

Post by steveyg50 »

I was reading recently, there's a school of thought that annuities are still a reasonably good idea. But only if you wait until about 75 and perhaps only a part of your pot. At that age for 100 k you can get about £7000 per year ( not indexed).

Since I have no kids, its a consideration for me. Added to the state pension, if one annuitises 100k , its a living wage and peace of mind... no fear of running your pot dry even if living to 120 or whatever.

Also there's always a chance of being scammed, hacked etc and losing your pot, or some of it. No offense but some people's minds are not quite as sharp in old age. I quite like the idea of the peace of mind of a guaranteed minimum wage so to speak..I guess you are having to pay for the peace of mind but even so....
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Re: Uk: any advice on annuities?

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steveyg50 wrote: Mon Jun 07, 2021 3:22 pm I was reading recently, there's a school of thought that annuities are still a reasonably good idea. But only if you wait until about 75 and perhaps only a part of your pot. At that age for 100 k you can get about £7000 per year ( not indexed).
Do you remember why they thought it's only a good idea if you wait until about 75? At 58 you'd get more than 4K per year for 100 k. But not indexed - that's my worry.
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde
steveyg50
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Re: Uk: any advice on annuities?

Post by steveyg50 »

Someone more knowledgable will know better, but as I understand it -

At a younger age you may as well keep your pot and you can probably pay yourself 3 or maybe 4% without it decreasing in value (safe withdrawal limit etc),depending on your asset allocation etc.

But the longer you wait the more you get as a %, on the annuity, so you are getting approx 7% at 75. (non index), and I believe an index linked (3% escalation) is still about 5.5k on 100k.This seems a bit more than it would be wise to drawdown yourself if you're planning on not shuffling your mortal coil until a very advanced age. They can pay more because they know you will die at 85 (or whatever it is), by which I mean on average you will,. Whereas as an individual you don't know if you will die at an average age or before or you may live to 100 or more. You have to plan for the upper limit,annuity company can plan for the average.

- at more advanced age you may be getting less able to handle your own monetary affairs and be getting more at risk of fraud. Some older people can become too trusting...

- at 75 peace of mind of guaranteed income may be more important than previously.

I am seriously thinking I may annuitize maybe 100k or 150k of my pot when I'm 75 or so..(given that's 23 years away it could all be different by then). I don't even know why I'm even thinking about these things now really 😏
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Re: Uk: any advice on annuities?

Post by Valuethinker »

steve321 wrote: Mon Jun 07, 2021 3:46 pm
steveyg50 wrote: Mon Jun 07, 2021 3:22 pm I was reading recently, there's a school of thought that annuities are still a reasonably good idea. But only if you wait until about 75 and perhaps only a part of your pot. At that age for 100 k you can get about £7000 per year ( not indexed).
Do you remember why they thought it's only a good idea if you wait until about 75? At 58 you'd get more than 4K per year for 100 k. But not indexed - that's my worry.
An annuity is basically composed of 2 streams of cash that are returned to you (3 or 4)

- the returns on the investments made
- the return of your capital over your average expected lifetime ("mortality credit")
- negative cash flow - the profit of the insurance company after costs (which is not transparent to you - what makes it "fair" is that it is a regulated and competitive market, and this is also why insurance companies try so hard to sell you more complex products - annuities are not terribly profitable)

So your Mortality Credit grows, the older you get -- less expected life. That increases the total return you get per annum.

Note that for premium amounts of say less than £50k, various reports have found them to be spectacularly bad value. That's why George Osborne created Pension Freedom.

One downside is that annuitants tend to live longer than the average (the reverse of other insurance products, and is known as "adverse selection"). The insurance companies do adjust for that. And life expectancies have been getting steadily longer for the groups that are likely to privately purchase annuities (basically more affluent, more educated, more professional).

One upside (there had to be one) is that Covid-19 will have given the insurance companies something of a windfall - an awful lot of retirees have died years before their time. How that is adjusted for in the actuarial assumptions is, however, regulated by the government. They might just treat it as a "blip".

75 is a guess at a "tipping point" where the average remaining life expectancy is low enough that the mortality credit is significant.

I do favour purchase of annuities, but probably not at retirement age but 5-15 years later. For the reasons expressed in this thread:

- declining cognitive ability as you get older
- longevity insurance - protection against outliving your savings
- protection against volatility of financial markets

I generally favour inflation linked annuities because they provide greater longevity insurance.

It's the 90-something in a care home that worries me. However at £5k pcm, your pot of capital can get eaten up quite fast. If your assets drop below the threshold (£16,500?) then of course the state will pay but the conditions for state funded care home residents can be pretty awful. I know from personal experience that it makes a big difference in care, particularly with dementia residents - how they are treated.

Scotland btw is different than England & Wales re care home situation.

The main problem with annuities is that low returns on bonds (the assets which underpin the annuity liability the insurer takes on) mean that annuity rates are being crushed.

My solution is to wait to emply, to increase the mortality credit.
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Re: Uk: any advice on annuities?

Post by Valuethinker »

steve321 wrote: Mon Jun 07, 2021 3:46 pm
steveyg50 wrote: Mon Jun 07, 2021 3:22 pm I was reading recently, there's a school of thought that annuities are still a reasonably good idea. But only if you wait until about 75 and perhaps only a part of your pot. At that age for 100 k you can get about £7000 per year ( not indexed).
Do you remember why they thought it's only a good idea if you wait until about 75? At 58 you'd get more than 4K per year for 100 k. But not indexed - that's my worry.
Taking on an unindexed annuity at age 58 is leaving a lot to chance unless you have a Defined Benefit pension scheme (private or civil service). The UK state pension is inflation-indexed, but for a middle class person it's not a lot of money. Also it only kicks in at 67 (depending on how old you are, now).

Rental income from real estate is an inflation-linked (normally) income stream. Residential rents tend to rise with inflation in the long run.
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Re: Uk: any advice on annuities?

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Valuethinker wrote: Tue Jun 08, 2021 4:29 am
steve321 wrote: Mon Jun 07, 2021 3:46 pm
steveyg50 wrote: Mon Jun 07, 2021 3:22 pm I was reading recently, there's a school of thought that annuities are still a reasonably good idea. But only if you wait until about 75 and perhaps only a part of your pot. At that age for 100 k you can get about £7000 per year ( not indexed).
Do you remember why they thought it's only a good idea if you wait until about 75? At 58 you'd get more than 4K per year for 100 k. But not indexed - that's my worry.
Taking on an unindexed annuity at age 58 is leaving a lot to chance unless you have a Defined Benefit pension scheme (private or civil service). The UK state pension is inflation-indexed, but for a middle class person it's not a lot of money. Also it only kicks in at 67 (depending on how old you are, now).

Rental income from real estate is an inflation-linked (normally) income stream. Residential rents tend to rise with inflation in the long run.
Thank you. Yes we have a steady stream of income from rented properties but one of the reasons I was thinking of annuities was precisely for when we might be too old or won't feel like managing our properties.
So yes probably won't bother to look into it further now but it's good to keep in mind the possibility at age 75 or later
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde
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Re: Uk: any advice on annuities?

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grok87 wrote: Mon Jun 07, 2021 10:26 am
steve321 wrote: Mon Jun 07, 2021 9:05 am ok thanks for your feedback; I only just got curious about this today (I have always liked to have more control on things but it occurred to me that as one ages they might no longer want to (or be able to) manage their wealth). So today I ended up on a pae doing online comparisons, which did not offer inflation linked once - hence my question. Will look into it more closely. Cheers
it woudl be great, steve, if you could post any info that you find after you look into it more closely...
cheers
grok
I got the impression from the answers above that it's best not to bother with it until you are at least 75 so I'm not researching it for the moment but valuethinker has some interesting points in his post above
Success does not bring happiness. In fact, happiness IS success. | 'There are only two tragedies in life: one is not getting what one wants, and the other is getting it.' Oscar Wilde
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Re: Uk: any advice on annuities?

Post by ralphjones »

Annuity returns drives by long-term gilts rate. You could 'swop out' any long gilts in your portfolio for an annuity, so you wouldn't be giving up any long-term equity return.

Inflation-linking is expensive. Another strategy is to stagger 'simple' annuities; say half at 70, half at 75.

Also consider purchased life annuities [ as opposed to 'compulsory purchase annuities'], which are outside a pension wrapper and most of return is untaxed [considered return of capital, not income]
grok87
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Re: Uk: any advice on annuities?

Post by grok87 »

steve321 wrote: Tue Jun 08, 2021 6:18 am
grok87 wrote: Mon Jun 07, 2021 10:26 am
steve321 wrote: Mon Jun 07, 2021 9:05 am ok thanks for your feedback; I only just got curious about this today (I have always liked to have more control on things but it occurred to me that as one ages they might no longer want to (or be able to) manage their wealth). So today I ended up on a pae doing online comparisons, which did not offer inflation linked once - hence my question. Will look into it more closely. Cheers
it woudl be great, steve, if you could post any info that you find after you look into it more closely...
cheers
grok
I got the impression from the answers above that it's best not to bother with it until you are at least 75 so I'm not researching it for the moment but valuethinker has some interesting points in his post above
i would agree. i'm planning to wait till i'm in my 70s to annuitize
RIP Mr. Bogle.
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