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Frank Hovis

90% Of Pension Annuities Do Not Rise With Inflation

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I'm shocked by this.

It's much too far away for me to have looked at this before but I was assuming that they all did as nobody would want to buy an annuity that would pay less in real terms every year, making you poorer every year.

Anybody reliant on this over the last few years would have seen the cost of their essentials (utilities, food) shoot up way above the official inflation indexes and be significantly poorer as a result.

Given the BoE's fast and loose attitude to inflation this looks like a looming disaster.

Millions of Britons could see their spending power slashed by billions of pounds as the corrosive effect of inflation takes its toll on their retirement income.

Of the 400,000 people buying an annuity each year as they enter retirement, enhanced annuity provider MGM Advantage said 90 per cent of those purchase products that provide a 'level income' for the rest of their lives.

But while in the short-term level income annuities tend to provide a bigger annual payout than those offering annual rises, they are vulnerable to the effects of inflation in the long-term.

MGM has calculated that if inflation averages 3 per cent over the next 25 years, the real value of a person's annuity income would fall by 53 per cent - collectively wiping billions off retirees' purchasing power over that period.

http://www.dailymail.co.uk/money/pensions/article-2348840/Pensioners-incomes-fall-billions-opt-level-annuities-wont-increase-line-inflation.html

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I'm shocked by this.

It's much too far away for me to have looked at this before but I was assuming that they all did as nobody would want to buy an annuity that would pay less in real terms every year, making you poorer every year.

Anybody reliant on this over the last few years would have seen the cost of their essentials (utilities, food) shoot up way above the official inflation indexes and be significantly poorer as a result.

Given the BoE's fast and loose attitude to inflation this looks like a looming disaster.

http://www.dailymail.co.uk/money/pensions/article-2348840/Pensioners-incomes-fall-billions-opt-level-annuities-wont-increase-line-inflation.html

I thought the individual purchaser could opt for a linker or not. If you pay less for a non-linker, in the hope that you won't get burned, so be it.

The problem is that annuity rates are so low that people might take a non-linker as a means of making their retirement plans work at all, without much consideration over what may happen in time.

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I thought the individual purchaser could opt for a linker or not. If you pay less for a non-linker, in the hope that you won't get burned, so be it.

The problem is that annuity rates are so low that people might take a non-linker as a means of making their retirement plans work at all, without much consideration over what may happen in time.

Yes they can but 90% of them aren't doing that, this is a bit beyond "so be it". This means a nation of welfare-dependent pensioners in ten years.

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I thought the individual purchaser could opt for a linker or not. If you pay less for a non-linker, in the hope that you won't get burned, so be it.

The problem is that annuity rates are so low that people might take a non-linker as a means of making their retirement plans work at all, without much consideration over what may happen in time.

I went for a non index linked annuity at 7.6%, when I retired five years ago, because I wanted the maximum income during the early years of retirement when we are likely to be most active and want to spend the most money. To be honest, my monthly annuity buys just as much, if not more, than it did five years ago. That's not to say that it won't devalue in the future, but my state pension will kick-in in a few years time to fill any gap. At the time, I discussed it at length with my accountant and he agreed that in my circumstances, non index linked was the obvious way to go.

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I went for a non index linked annuity at 7.6%, when I retired five years ago, because I wanted the maximum income during the early years of retirement when we are likely to be most active and want to spend the most money. To be honest, my monthly annuity buys just as much, if not more, than it did five years ago. That's not to say that it won't devalue in the future, but my state pension will kick-in in a few years time to fill any gap. At the time, I discussed it at length with my accountant and he agreed that in my circumstances, non index linked was the obvious way to go.

And you have substantial savings and have factored in the time when the state pension kicks in.

So you are one of the 90% who has done this as an informed choice and are cushioned from that income stream dwindling.

I suspect that you are in a minority.

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I went for a non index linked annuity at 7.6%, when I retired five years ago, because I wanted the maximum income during the early years of retirement when we are likely to be most active and want to spend the most money. To be honest, my monthly annuity buys just as much, if not more, than it did five years ago. That's not to say that it won't devalue in the future, but my state pension will kick-in in a few years time to fill any gap. At the time, I discussed it at length with my accountant and he agreed that in my circumstances, non index linked was the obvious way to go.

Do most people now still take the tax free lump sum I wonder........for healthy fit basic rate tax payers would not an higher income now be more of an advantage, index-linked would be something worth taking, all depending. ;)

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People have no idea how compound interest works. If they did our current financial system would not exist.

This. I never cease to be surprised by how many people think inflation of 2% is 'ok'.

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Do most people now still take the tax free lump sum I wonder........for healthy fit basic rate tax payers would not an higher income now be more of an advantage, index-linked would be something worth taking, all depending. ;)

I took the tax free lump sum. I keep it in a deposit account and drip feed it into our ISAs at, currently, about £11K a year.

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This. I never cease to be surprised by how many people think inflation of 2% is 'ok'.

Doesn't take long at that rate for things to double in price. ;)

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Slightly confused by this. How much of this is caused by (A.) easing or (B.) a worldwide glut of savings admittedly all chasing yield, in part due to (A.). :blink:

Edited by Secure Tenant

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I am not shocked. My mum is due to take her annuity this year with a smallish pot.

I initially thought she should take the linker - 1% uplift.

Then I did the calcs.

She would have to live to 90 for the uplift to be worth it.

So it is better to take the annuity that does not rise.

She's only 66.

If you took the 3% up lift, you'd have to live to over 100 for it to be worth it.

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I went for a non index linked annuity at 7.6%, when I retired five years ago, because I wanted the maximum income during the early years of retirement when we are likely to be most active and want to spend the most money. To be honest, my monthly annuity buys just as much, if not more, than it did five years ago. That's not to say that it won't devalue in the future, but my state pension will kick-in in a few years time to fill any gap. At the time, I discussed it at length with my accountant and he agreed that in my circumstances, non index linked was the obvious way to go.

Good point about front-loading your retirement income, if that's the correct phrase. Definitely makes sense.

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I am not shocked. My mum is due to take her annuity this year with a smallish pot.

I initially thought she should take the linker - 1% uplift.

Then I did the calcs.

She would have to live to 90 for the uplift to be worth it.

So it is better to take the annuity that does not rise.

She's only 66.

If you took the 3% up lift, you'd have to live to over 100 for it to be worth it.

Yes, I was surprised when I did the figures, you would have to live to a ripe old age to break even, and even then, would you need to spend as much money at ninety as you would at sixty?

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I went for a non index linked annuity at 7.6%, when I retired five years ago, because I wanted the maximum income during the early years of retirement when we are likely to be most active and want to spend the most money. To be honest, my monthly annuity buys just as much, if not more, than it did five years ago. That's not to say that it won't devalue in the future, but my state pension will kick-in in a few years time to fill any gap. At the time, I discussed it at length with my accountant and he agreed that in my circumstances, non index linked was the obvious way to go.

This..

Your income needs are likely to drop as you get older, unless you plan to be going on round the world cruises on the SS Norovirus at the age of 85..

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This. I never cease to be surprised by how many people think inflation of 2% is 'ok'.

Indeed.. 2% is way too low, given that your average human works with an instinctive discount rate of perhaps 30%.

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I went for a non index linked annuity at 7.6%, when I retired five years ago, because I wanted the maximum income during the early years of retirement when we are likely to be most active and want to spend the most money. To be honest, my monthly annuity buys just as much, if not more, than it did five years ago. That's not to say that it won't devalue in the future, but my state pension will kick-in in a few years time to fill any gap. At the time, I discussed it at length with my accountant and he agreed that in my circumstances, non index linked was the obvious way to go.

Indeed. There's a structural reason behind this as well. There's a shortage of higher yielding linked assets around and so a lot of linked annuities are backed by index-linked gilts, whilst non-linked annuities are generally backed by corporate bonds or other higher yielding assets. As such linked annuities are structurally expensive currently and thereby it is rational that most consumers avoid them. If you have a linked defined benefit pension on the other hand, then lucky you - funding it is not your problem.

I haven't done the numbers but you would need to look at what inflation stress you would need to break even at your expected lifespan - worth bearing in mind that expected RPI inflation over the next 25 years is currently around 3.7%. I suspect the result wouldn't look an appealing bet to most people. And all this is before considering the increased utility of a front loaded pension in real terms, even if the pricing between linked and non-linked was consistent.

Interesting political dimensions of this - expect an extremely strong anti-inflation lobby from the public down the line...

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This..

Your income needs are likely to drop as you get older, unless you plan to be going on round the world cruises on the SS Norovirus at the age of 85..

Well... Until your LTC needs kick in :D

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I am not shocked. My mum is due to take her annuity this year with a smallish pot.

I initially thought she should take the linker - 1% uplift.

Then I did the calcs.

She would have to live to 90 for the uplift to be worth it.

So it is better to take the annuity that does not rise.

She's only 66.

If you took the 3% up lift, you'd have to live to over 100 for it to be worth it.

+1

Index linked annuities are very roughly about half the flat rate annuities - at around normal retirement age.

It's no surprise that most people opt for the flat rate.

Even if a saver takes the index linked it being indexed doesn't take into account that policies allow essentials to inflate at sky high levels while the official index still stays relatively low. A rip-off whichever way.

Edited by billybong

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Do most people now still take the tax free lump sum I wonder........for healthy fit basic rate tax payers would not an higher income now be more of an advantage, index-linked would be something worth taking, all depending. ;)

Of course, it would be folly not to take the lump sum.

I've always thought it would be a way to pay off a mortgage. But at today's surreal rates it might easily make more sense to reinvest the 25% and keep the mortgage or rent (whichever it happens to be at the time).

The one thing that would be obvious nonsense would be to turn tax-free money into taxable money.

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Doesn't take long at that rate for things to double in price. ;)

35 years.

Once you've been a pensioner for 35 years, you probably have less capacity to enjoy life than you had in those golden years of leisure.

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  • 243 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
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