Depressing pension statement

[MikeKite]

Grr_Boris said:

MikeKite said:

"It’s a bad time to be old and planning on living off savings."

Why?

Longevity is increasing and interest rates are very low, whilst inflation is likely to increase.

Alas I don't have a crystal ball so don't know what inflation will do - but it might be worth looking back at history to see that it currently isn't bad at all (but that's not to say it could be 5 years down the road).

[Grr_Boris]

MikeKite said:

Alas I don't have a crystal ball so don't know what inflation will do - but it might be worth looking back at history to see that it currently isn't bad at all (but that's not to say it could be 5 years down the road).

You can easily see what the market forecasts for inflation are. But of course it's not the level of future inflation in isolation, it's the level of inflation relative to increase which is the key point here.

[MikeKite]

Grr_Boris said:

MikeKite said:

Alas I don't have a crystal ball so don't know what inflation will do - but it might be worth looking back at history to see that it currently isn't bad at all (but that's not to say it could be 5 years down the road).

You can easily see what the market forecasts for inflation are. But of course it's not the level of future inflation in isolation, it's the level of inflation relative to increase which is the key point here.

"You can easily see what the market forecasts for inflation are."

Indeed, but I'm not sure that many pay much attention given the accuracy of predictions

"But of course it's not the level of future inflation in isolation, it's the level of inflation relative to increase which is the key point here."

It tends to be sustained high inflation and falling markets that cause issues, neither of which we have currently.

[Grr_Boris]

MikeKite said:

"You can easily see what the market forecasts for inflation are."

Indeed, but I'm not sure that many pay much attention given the accuracy of predictions

"But of course it's not the level of future inflation in isolation, it's the level of inflation relative to increase which is the key point here."

It tends to be sustained high inflation and falling markets that cause issues, neither of which we have currently.

For people seeking to generate an income using low risk assets (which is the subject of the thread) the relevant parameters are interest rates and inflation. Hence the reference to the real returns of c. -2.5% earlier in the thread.

Obviously, if you want to use risky assets (and hence expose yourself to market falls) to generate higher income, then different considerations apply.

[anonymous-user]

My pension company bombarded me for years in an attempt to give up my guaranteed annuity of 9%.
I resisted and now get £5k pa from a £55k pot.

[Grr_Boris]

Cliffe60 said:

My pension company bombarded me for years in an attempt to give up my guaranteed annuity of 9%.
I resisted and now get £5k pa from a £55k pot.

Presumably they offered for you to exchange your guaranteed annuity rate to be replaced by some other alternative benefit?

Edited by Grr_Boris on Monday 12th July 14:34

[MikeKite]

Grr_Boris said:

MikeKite said:

"You can easily see what the market forecasts for inflation are."

Indeed, but I'm not sure that many pay much attention given the accuracy of predictions

"But of course it's not the level of future inflation in isolation, it's the level of inflation relative to increase which is the key point here."

It tends to be sustained high inflation and falling markets that cause issues, neither of which we have currently.

For people seeking to generate an income using low risk assets (which is the subject of the thread) the relevant parameters are interest rates and inflation. Hence the reference to the real returns of c. -2.5% earlier in the thread.

Obviously, if you want to use risky assets (and hence expose yourself to market falls) to generate higher income, then different considerations apply.

I think you need to be very clear when discussing "low risk" assets - are you referencing annuities?

[Grr_Boris]

MikeKite said:

I think you need to be very clear when discussing "low risk" assets - are you referencing annuities?

Well, an annuity has no investment risk, although the assets backing them would be primarily low risk assets.

Edited by Grr_Boris on Monday 12th July 17:49

[anonymous-user]

Grr_Boris said:

Cliffe60 said:

My pension company bombarded me for years in an attempt to give up my guaranteed annuity of 9%.
I resisted and now get £5k pa from a £55k pot.

Presumably they offered for you to exchange your guaranteed annuity rate to be replaced by some other alternative benefit?

Edited by Grr_Boris on Monday 12th July 14:34

They offered an increased pot but it was less than double , whereas it would have needed to be nearly 4x.

[Mr Whippy]

Mr Pointy said:

Mr Whippy said:

It’s a bad time to be old and planning on living off savings.
The fruits of the baby boom are now somewhat difficult to take because everyone wants to take them at the same time...

You must be kidding - it's the best time. There are plenty of good investment institutions with low charges, multiple funds with differing levels of risk & easy methods of transfer between them. Add that to unprecendented levels of availability of financial & investment education & advice (in both senses of the word) & it's never been better for someone with savings.

Gone are the old days of 1.5% charges for one letter a year, scrabbling around on a pittance of an annuity & losing large portions of your pension to a life company when you die. Now you can pay 0.2% & pass it all on to your heirs outside IHT.

So why isn’t some annuity provider just doing what you say, then taking their 0.2% or whatever margin floats their boat?

The truth is as I’ve said.

Never before has the certainty of risk being realised so high. So essentially zero growth insurance is offered because they can’t lose.

In my view it’s a terrible time, to get anything like the returns of the saga generation, you’re having to risk your capital in your own investments... rather than essentially take no risk for the same return.


Unless the annuity providers are all idiots and have no idea what they’re doing?
Or maybe they’re regulated to be realistic about the risk they’re selling?

[ATG]

From the discussions that have happened here previously, I think it is pretty clear that many people (understandably) don't appreciate and perhaps don't want to appreciate (because it is frightening) the relationship between risk and return, and the degree of financial risk that is typically considered prudent for retirement savings. They tend to be comfortable with much higher levels of financial risk than a professional would consider to be prudent, and the pro is going to usually conclude that's because the punter doesn't really understand the risk. And no one likes to be told they don't understand something, or that you have to save a ton of money to get a pension that's anywhere vaguely close to your salary, so the whole thing kicks off.

[Talksteer]

cavey76 said:

£2600 index linked isnt the same as dividing £100K/£2600 and thinking it would last 40 years.

Assuming indexing grew it 1.5% a year(not sure if reasonable or not) it would be £4700/yr by year 40.

We’ll see more of these posts as people with modest pension funds say, “eh but i might aswell just spunk it as its the same as 30 years at £modestsum/yr”

FWIW - i ‘d already be on the phone to AJBell and have that bad boy transferred under my own control.

I'm doing this myself as I have a DB pension that is closed to further accumulation. As annuity rates are so low it has a transfer value of £370k and I only put about £50k in it over 16 years so essentially the low interest rates at the moment have given me a massive windfall.

It would pay out only £11k a year, that £11k is indexed to CPI but is capped at 2.5% which looking at the last 30 years (I am 40) would mean that its real value would be about 15-20% lower by retirement as some years CPI will higher than 2.5%.

Over the 30 year time-frame most indexes are easily positive, if we look at any given 25 year period over the last 35 years the FTSE has returned between 6.4 and 9.9% with an average of 8.3%. So even offseting an average inflation of 2.7% in that period a 25 year investment would be expected to grow in real terms between 250% and 580%

https://www.ig.com/uk/trading-strategies/what-are-...

[Mr Pointy]

Mr Whippy said:

So why isn’t some annuity provider just doing what you say, then taking their 0.2% or whatever margin floats their boat?

Because they have to make a profit. No-one is denying that annuity rates are rubbish & that to get a better return you have to take some risk, but these days an annuity is not the best decision to make, maybe unless you are helath compromised.

What do you think is going to trigger a long term world crash in the markets? We've had 18 months of a global pandemic & it hasn't done it - in fact many investments have rocketed. Yes it would be unwise to be 100% in stocks if you are retired but there's plenty of advice on building a balanced defensive portfolio that can allow you to pull out 4% (or whatever magic number you favour) a year & probably not run out of money before you are 90.

If you are so set on annuities because you that's what you are living on then I'm sorry, but don't try & apply your situation to the market as it is today.

[MikeKite]

Mr Pointy said:

Mr Whippy said:

So why isn’t some annuity provider just doing what you say, then taking their 0.2% or whatever margin floats their boat?

Because they have to make a profit. No-one is denying that annuity rates are rubbish & that to get a better return you have to take some risk, but these days an annuity is not the best decision to make, maybe unless you are helath compromised.

What do you think is going to trigger a long term world crash in the markets? We've had 18 months of a global pandemic & it hasn't done it - in fact many investments have rocketed. Yes it would be unwise to be 100% in stocks if you are retired but there's plenty of advice on building a balanced defensive portfolio that can allow you to pull out 4% (or whatever magic number you favour) a year & probably not run out of money before you are 90.

If you are so set on annuities because you that's what you are living on then I'm sorry, but don't try & apply your situation to the market as it is today.

"but these days an annuity is not the best decision to make, maybe unless you are helath compromised."

It's not always black and white.

"balanced defensive portfolio"

What is one of those?

[Talksteer]

ATG said:

From the discussions that have happened here previously, I think it is pretty clear that many people (understandably) don't appreciate and perhaps don't want to appreciate (because it is frightening) the relationship between risk and return, and the degree of financial risk that is typically considered prudent for retirement savings. They tend to be comfortable with much higher levels of financial risk than a professional would consider to be prudent, and the pro is going to usually conclude that's because the punter doesn't really understand the risk. And no one likes to be told they don't understand something, or that you have to save a ton of money to get a pension that's anywhere vaguely close to your salary, so the whole thing kicks off.

On the other hand the pension industry, IFAs and FCA appear to be inflexible in assuming that we all need products which remove all risk at the cost of making the average returns negative.

This is out of step with how industry/project management/tech/policy is all going. It is shifting towards an approach of understand the first principles and then manage things as they occur or fire and adjust vs ready..... aim...... fire.

Ergo I would much rather have a draw down fund and then manage outgoings vs returns vs longevity myself.

[ATG]

Mr Pointy said:

Mr Whippy said:

So why isn’t some annuity provider just doing what you say, then taking their 0.2% or whatever margin floats their boat?

Because they have to make a profit. No-one is denying that annuity rates are rubbish & that to get a better return you have to take some risk, but these days an annuity is not the best decision to make, maybe unless you are helath compromised.

What do you think is going to trigger a long term world crash in the markets? We've had 18 months of a global pandemic & it hasn't done it - in fact many investments have rocketed. Yes it would be unwise to be 100% in stocks if you are retired but there's plenty of advice on building a balanced defensive portfolio that can allow you to pull out 4% (or whatever magic number you favour) a year & probably not run out of money before you are 90.

If you are so set on annuities because you that's what you are living on then I'm sorry, but don't try & apply your situation to the market as it is today.

You've misunderstood what he's saying. He's not set on annuities. He's pointing out that they're sold competitively and therefore the returns they offer are fair given what they guarantee and the assets that they can invest in.

Suggesting there aren't reasonable scenarios that could significantly devalue equities is the kind of thing that would get a professional investment advisor quite rightly sacked, fined and potentially banged up. Stocks are at their current level because money is being pumped into the economy and is accumulating in assets, and interest rates are exceedingly low meaning that sum of expected low risk future cash flows is effectively infinite which makes pricing them close to arbitrary.

If inflation kicks off a bit, QE dries up and interest rates rise by a few percentage points ... i.e. a return to normality ... what happens to companies' profit forecasts? Probably not much. What happens to the net present value of those forecast earnings i.e. their share price?

A scenario like that is clearly not completely fanciful, so does it make sense for a retiree to leave themselves exposed to it? A portfolio that does well 90% of the time but catastrophically badly 10% of the time is OK if you can live happily through the bad 10%, but if you're relying on it for food, heating, etc ...

[MikeKite]

ATG said:

Mr Pointy said:

Mr Whippy said:

So why isn’t some annuity provider just doing what you say, then taking their 0.2% or whatever margin floats their boat?

Because they have to make a profit. No-one is denying that annuity rates are rubbish & that to get a better return you have to take some risk, but these days an annuity is not the best decision to make, maybe unless you are helath compromised.

What do you think is going to trigger a long term world crash in the markets? We've had 18 months of a global pandemic & it hasn't done it - in fact many investments have rocketed. Yes it would be unwise to be 100% in stocks if you are retired but there's plenty of advice on building a balanced defensive portfolio that can allow you to pull out 4% (or whatever magic number you favour) a year & probably not run out of money before you are 90.

If you are so set on annuities because you that's what you are living on then I'm sorry, but don't try & apply your situation to the market as it is today.

You've misunderstood what he's saying. He's not set on annuities. He's pointing out that they're sold competitively and therefore the returns they offer are fair given what they guarantee and the assets that they can invest in.

Suggesting there aren't reasonable scenarios that could significantly devalue equities is the kind of thing that would get a professional investment advisor quite rightly sacked, fined and potentially banged up. Stocks are at their current level because money is being pumped into the economy and is accumulating in assets, and interest rates are exceedingly low meaning that sum of expected low risk future cash flows is effectively infinite which makes pricing them close to arbitrary.

If inflation kicks off a bit, QE dries up and interest rates rise by a few percentage points ... i.e. a return to normality ... what happens to companies' profit forecasts? Probably not much. What happens to the net present value of those forecast earnings i.e. their share price?

A scenario like that is clearly not completely fanciful, so does it make sense for a retiree to leave themselves exposed to it? A portfolio that does well 90% of the time but catastrophically badly 10% of the time is OK if you can live happily through the bad 10%, but if you're relying on it for food, heating, etc ...

"A portfolio that does well 90% of the time but catastrophically badly 10% of the time is OK if you can live happily through the bad 10%, but if you're relying on it for food, heating, etc"

Yep, and that was my point about annuities not always being black and white - some may want to cover their "core income" through guaranteed sources and purchase an annuity with some of their pot to cover this.

[ATG]

Talksteer said:

ATG said:

From the discussions that have happened here previously, I think it is pretty clear that many people (understandably) don't appreciate and perhaps don't want to appreciate (because it is frightening) the relationship between risk and return, and the degree of financial risk that is typically considered prudent for retirement savings. They tend to be comfortable with much higher levels of financial risk than a professional would consider to be prudent, and the pro is going to usually conclude that's because the punter doesn't really understand the risk. And no one likes to be told they don't understand something, or that you have to save a ton of money to get a pension that's anywhere vaguely close to your salary, so the whole thing kicks off.

On the other hand the pension industry, IFAs and FCA appear to be inflexible in assuming that we all need products which remove all risk at the cost of making the average returns negative.

This is out of step with how industry/project management/tech/policy is all going. It is shifting towards an approach of understand the first principles and then manage things as they occur or fire and adjust vs ready..... aim...... fire.

Ergo I would much rather have a draw down fund and then manage outgoings vs returns vs longevity myself.

Where is this inflexibility? They offer advice on risk versus return. They offer a range of products. You have the freedom to do what you like.

[cavey76]

Talksteer said:

cavey76 said:

£2600 index linked isnt the same as dividing £100K/£2600 and thinking it would last 40 years.

Assuming indexing grew it 1.5% a year(not sure if reasonable or not) it would be £4700/yr by year 40.

We’ll see more of these posts as people with modest pension funds say, “eh but i might aswell just spunk it as its the same as 30 years at £modestsum/yr”

FWIW - i ‘d already be on the phone to AJBell and have that bad boy transferred under my own control.

I'm doing this myself as I have a DB pension that is closed to further accumulation. As annuity rates are so low it has a transfer value of £370k and I only put about £50k in it over 16 years so essentially the low interest rates at the moment have given me a massive windfall.

It would pay out only £11k a year, that £11k is indexed to CPI but is capped at 2.5% which looking at the last 30 years (I am 40) would mean that its real value would be about 15-20% lower by retirement as some years CPI will higher than 2.5%.

Over the 30 year time-frame most indexes are easily positive, if we look at any given 25 year period over the last 35 years the FTSE has returned between 6.4 and 9.9% with an average of 8.3%. So even offseting an average inflation of 2.7% in that period a 25 year investment would be expected to grow in real terms between 250% and 580%

https://www.ig.com/uk/trading-strategies/what-are-...

You're only challenge might be, and don't quote me, but i THINK moving DB schemes beyond £30K in value is very very difficult as you need an advisor to sign off and most of them are fearful of being done for misselling. Defo speak with AJBell. I cant rate them highly enough and find them clear concise and up front on the art of the possible.

[Caddyshack]

Grr_Boris said:

MikeKite said:

"It’s a bad time to be old and planning on living off savings."

Why?

Longevity is increasing and interest rates are very low, whilst inflation is likely to increase.

The savings and investments need to be geared towards income then and ideally try to index link that income...which is hard to do...we tend to live a life of spending what we earn and are not very good at making passive money making machines.

Buy to Lets were becoming useful tools but the Govt decided to tax them to death with the higher SDLT and also the income tax / offset of interest. Plus the legislation favours the tenants. It is a shame as it was helping to solve some of the pension / retirement deficit. BTL is and was not the answer to everything but it was a good source of cash flow as part of the plan.