Depressing pension statement

[MikeKite]

Caddyshack said:

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.

I'm not clear how something as illiquid and inflexible (in terms of income) as BTL could be used as a bedrock of retirement income.

[Groat]

MikeKite said:

I'm not clear how something as illiquid and inflexible (in terms of income) as BTL could be used as a bedrock of retirement income.

Given the numbers whose btls do exactly that I don't see how it could be any clearer.

[Talksteer]

cavey76 said:

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.

I'm getting the government mandated advice both the IFA and I know that AJBell will do a SIPP so long as the advice was given irrespective of what the advice was!

[Caddyshack]

MikeKite said:

Caddyshack said:

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.

I'm not clear how something as illiquid and inflexible (in terms of income) as BTL could be used as a bedrock of retirement income.

You are right, they are not very liquid BUT We have had the same tenants in 2 of our properties for over 10 yrs....it is nice to rely on about £2k per month gross without any fear or eroding capital in investments or what the markets are doing. We all know it takes a lot of capital invested in equities to generate £2k of cash flow. Yes, there is some tax to pay on that. I would not say bedrock, It is a good part of a money generating machine if they were bought some time ago when properties were cheaper and stamp duty was less and stress tests were so restrictive.


As i said, the WERE becoming useful tools. They are not a good home now for £1m of liquid cash but they were useful with 25% to 40% deposits and then low cost buy to lets...it used to be a scaleable proposition with enough deposit.

[xeny]

MikeKite said:

I'm not clear how something as illiquid and inflexible (in terms of income) as BTL could be used as a bedrock of retirement income.

I've no love of BTL, but isn't any asset, even if illiquid and inflexible that offers good enough returns potentially workable for retirement income?

Critical issue is presumably low volatility of return, or acceptance of the need to run a cash float.

[MikeKite]

xeny said:

MikeKite said:

I'm not clear how something as illiquid and inflexible (in terms of income) as BTL could be used as a bedrock of retirement income.

I've no love of BTL, but isn't any asset, even if illiquid and inflexible that offers good enough returns potentially workable for retirement income?

Critical issue is presumably low volatility of return, or acceptance of the need to run a cash float.

It's (relatively) easy to stress test a retirement portfolio based on (for example) equities and bonds) to see how sustainable your income would have been over the last century. It's tough to do that with No.1 Acacia Avenue, and I'd therefore be nervous of relying on it. How would the income have varied during the 70s for example? Would it have matched inflation? Would there have been voids? It's a tough one to answer.

[Caddyshack]

MikeKite said:

xeny said:

MikeKite said:

I'm not clear how something as illiquid and inflexible (in terms of income) as BTL could be used as a bedrock of retirement income.

I've no love of BTL, but isn't any asset, even if illiquid and inflexible that offers good enough returns potentially workable for retirement income?

Critical issue is presumably low volatility of return, or acceptance of the need to run a cash float.

It's (relatively) easy to stress test a retirement portfolio based on (for example) equities and bonds) to see how sustainable your income would have been over the last century. It's tough to do that with No.1 Acacia Avenue, and I'd therefore be nervous of relying on it. How would the income have varied during the 70s for example? Would it have matched inflation? Would there have been voids? It's a tough one to answer.

It has been a long accepted guide to assume 2 months voids per year. There will always be a tenant, the only variation is quality of tenant and the amount they are willing to pay but rents have generally risen over time and have been pretty reliable over the last 20 years. I am not here to sell buy to lets, I just feel that there have been a good way of boosting up retirement cash flow with a far lower cost per £1 of income in capital requirement due to the leverage that has been available.

[Mr Whippy]

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.

For goodness sake. Read what you just said.

So why aren’t annuity providers getting even slightly close to that performance, and taking their profit margin cut... exactly like I said?

Because they see a risk that you don’t?

Or they’re just lunatics who love putting themselves out of business?


No one knows what is going to happen. But I can assure you that annuity providers use some fairly serious stochastic modelling to do their projections.
If they see not much growth, then chances are anyone finding much more is doing so with significantly more risk.

If lots of people do that, there is a chance of lots of long-living old people being seriously punished for their greed.

[NickCQ]

Mr Whippy said:

But I can assure you that annuity providers use some fairly serious stochastic modelling to do their projections. If they see not much growth, then chances are anyone finding much more is doing so with significantly more risk.

The question is really whether anyone should want to pay for their benefits to be protected out to in a 1 in 200 year shock event, which is what the Solvency regulation of annuity writers achieves.

My feeling is that most people shouldn't. As you say, it may involve taking "significantly more risk", but it's significantly more than a very low base. A bit like those statistics where deaths from being struck by lightning increase by 50% (from 2 to 3 per annum).

[NickCQ]

Mr Whippy said:

If lots of people do that, there is a chance of lots of long-living old people being seriously punished for their greed.

I missed this first time round but this is really a preposterous comment!

[CarlosFandango11]

NickCQ said:

Mr Whippy said:

But I can assure you that annuity providers use some fairly serious stochastic modelling to do their projections. If they see not much growth, then chances are anyone finding much more is doing so with significantly more risk.

The question is really whether anyone should want to pay for their benefits to be protected out to in a 1 in 200 year shock event, which is what the Solvency regulation of annuity writers achieves.

My feeling is that most people shouldn't. As you say, it may involve taking "significantly more risk", but it's significantly more than a very low base. A bit like those statistics where deaths from being struck by lightning increase by 50% (from 2 to 3 per annum).

You are misrepresenting the difference in risk between annuities and drawdown, or don't understand it. Your 50% should be much, much higher.

[MikeKite]

CarlosFandango11 said:

NickCQ said:

Mr Whippy said:

But I can assure you that annuity providers use some fairly serious stochastic modelling to do their projections. If they see not much growth, then chances are anyone finding much more is doing so with significantly more risk.

The question is really whether anyone should want to pay for their benefits to be protected out to in a 1 in 200 year shock event, which is what the Solvency regulation of annuity writers achieves.

My feeling is that most people shouldn't. As you say, it may involve taking "significantly more risk", but it's significantly more than a very low base. A bit like those statistics where deaths from being struck by lightning increase by 50% (from 2 to 3 per annum).

You are misrepresenting the difference in risk between annuities and drawdown, or don't understand it. Your 50% should be much, much higher.

The risk of what?

[NickCQ]

CarlosFandango11 said:

You are misrepresenting the difference in risk between annuities and drawdown, or don't understand it. Your 50% should be much, much higher.

The risk in drawdown is whatever you want it to be. You could put the whole lot in government bonds / insured bank deposits / risk-free assets and it would be less risky than the credit risk of an insurance company. The 50% is part of the figure of speech not the analysis

Edited by NickCQ on Wednesday 14th July 11:23

[CarlosFandango11]

NickCQ said:

CarlosFandango11 said:

You are misrepresenting the difference in risk between annuities and drawdown, or don't understand it. Your 50% should be much, much higher.

The risk in drawdown is whatever you want it to be. You could put the whole lot in government bonds / insured bank deposits / risk-free assets and it would be less risky than the credit risk of an insurance company. The 50% is part of the figure of speech not the analysis

Edited by NickCQ on Wednesday 14th July 11:23

Whilst the risk of drawdown is whatever you want to to be, I expect very few people have any idea of what risks they're exposed to, let along the level of risk.
And I suspect most people wouldn't be investing their drawdown funds in risk free assets.
Sure, you used a figure of speech, but it's still misleading.

[MikeKite]

CarlosFandango11 said:

NickCQ said:

CarlosFandango11 said:

You are misrepresenting the difference in risk between annuities and drawdown, or don't understand it. Your 50% should be much, much higher.

The risk in drawdown is whatever you want it to be. You could put the whole lot in government bonds / insured bank deposits / risk-free assets and it would be less risky than the credit risk of an insurance company. The 50% is part of the figure of speech not the analysis

Edited by NickCQ on Wednesday 14th July 11:23

Whilst the risk of drawdown is whatever you want to to be, I expect very few people have any idea of what risks they're exposed to, let along the level of risk.
And I suspect most people wouldn't be investing their drawdown funds in risk free assets.
Sure, you used a figure of speech, but it's still misleading.

" I expect very few people have any idea of what risks they're exposed to, let along the level of risk."

Spot on.

[NickCQ]

MikeKite said:

"I expect very few people have any idea of what risks they're exposed to, let along the level of risk."
Spot on.

Annuitisation does not necessarily fix this - do you think the policyholders of Equitable Life had any idea of the counterparty risk they were exposed to until it was too late? Similarly, can any of us say we have a real view of Aviva or Aegon's creditworthiness beyond "they are big and I hope the regulators got it right this time"?

[CarlosFandango11]

NickCQ said:

MikeKite said:

"I expect very few people have any idea of what risks they're exposed to, let along the level of risk."
Spot on.

Annuitisation does not necessarily fix this - do you think the policyholders of Equitable Life had any idea of the counterparty risk they were exposed to until it was too late? Similarly, can any of us say we have a real view of Aviva or Aegon's creditworthiness beyond "they are big and I hope the regulators got it right this time"?

No one has claimed that annuities fix this.

As someone else mentioned, the FSCS offers protection for annuitants.

[Groat]

Does anyone think us oldtimers who were forced to buy annuities with the proceeds of our pensions should be given compensation for the losses incurred by being prevented from doing something sensible with the money rather than gifting it to annuity companies?

I do.

[NickCQ]

Groat said:

Does anyone think us oldtimers who were forced to buy annuities with the proceeds of our pensions should be given compensation for the losses incurred by being prevented from doing something sensible with the money rather than gifting it to annuity companies?

There's definitely a generation that missed out on a lot of investment return into retirement - with DB pensions and higher rates / shorter life expectancy that was less of a problem, but I think most working now will need a lot of return to deliver a reasonable retirement.

[BobsPigeon]

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.

Life expectancy has significantly slowed in its increase and infcat has been relatively stable for the last decade, covid aside the projections for the next couple of decade vary quite significantly from a continued linear rise that we've seen since the 1950s to quite a significant drop of. Personally, and I'm no expert, I doubt avg UK life expectancy to get much over 83 in the generations to come.