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The Spaniard

Surprising Expectation Of Inflation

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I see today that MGM Advantage is offering these initial annual rates for a 65-year old buying an annuity (without guarantee) for £100,000:

£2,935 escalating at 5% p.a.

£3,018 escalating at RPI

The proximity of these two payments suggests that MGM's actuaries are expecting average RPI to be close to 5% over the next twenty odd years.

This seems quite high to me and makes the 5% deal look the more attractive.

Comments?

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As an actuary myself doesn't sound right to me. Got a link??

Telegraph 'Best Buys' in the 'Your Money' section (page M5) today.

I thought maybe a typo but MGM's quoted rates for a 60-year old are again surprisingly close at £2,400 (5%) and £2,480 (RPI).

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Yeah I had a quick look - seems to be correct.

Comparing MGMs rates against other competitors, the outlier seems to be the 5% increasing option. You can get better RPI linked annuities than MGM elsewhere, but the 5% one is much better value than anyone else out there (so would suggest it isn't MGMs view on inflation that is unusual, but more how they are modelling their 5% fixed annuities).

Could be a mistake as you say - although looking at MGMs website they seem to specialise in "flexible income" and "enhanced annuities" so it's possible we're comparing apples with oranges.

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So my public sector pension I paid into for 4 years about a decade ago is worth the same as a cash pot of £70k.

Seems to be worth spending 10 years of your career in the public sector for the pension alone.

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Comments?

The cost of risk probably matters more to them than expectation. Though intuitively I'd've thought the length of life was the main risk here, with inflation a distant second.

Those figures just go to show the value of the basic state pension. An entitlement worth quarter of a million for those of us of working age. Arguably much, much more, on the premise of being underwritten by the state that will trash all other assets before it defaults on its own promises.

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I see today that MGM Advantage is offering these initial annual rates for a 65-year old buying an annuity (without guarantee) for £100,000:

£2,935 escalating at 5% p.a.

£3,018 escalating at RPI

The proximity of these two payments suggests that MGM's actuaries are expecting average RPI to be close to 5% over the next twenty odd years.

This seems quite high to me and makes the 5% deal look the more attractive.

Comments?

Inflation-linked annuities are usually poor value for various technical reasons (mostly the challenge of sourcing attractive inflation linked assets). 25 year RPI swaps are currently about 3.2% so in effect you are overpaying for roughly 3% escalation. Unless you live in daily terror of inflation it is a bit of a no brainer to buy the 5% fixed in that choice. Worth noting if that really is RPI unconstrained then you also have deflation risk whilst 5% fixed is floored. A lot of the RPI linked annuities include a zero inflation floor and possibly a 5% cap as well which affects the pricing somewhat - worth checking. I haven't considered it in great detail but I would have thought 3% fixed escalation is a sensible annuity flavour (or "guaranteed lifetime income" as it will become known in about 6 weeks time...).

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Those figures just go to show the value of the basic state pension. An entitlement worth quarter of a million for those of us of working age. Arguably much, much more, on the premise of being underwritten by the state that will trash all other assets before it defaults on its own promises.

Indeed. Hence why its hard not to be sceptical that this rather tasty benefit will be watered down horribly before many of us ultimately receive it.

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Indeed. Hence why its hard not to be sceptical that this rather tasty benefit will be watered down horribly before many of us ultimately receive it.

An observation I made back in the 1980s. Annuity rates falling from double-digits for oldies to 3% for boomers demonstrates that for private pensions.

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Indeed. Hence why its hard not to be sceptical that this rather tasty benefit will be watered down horribly before many of us ultimately receive it.

+1

My "spreadsheet" assumes that anyone with savings won't receive a bean by the time I retire - 15/20 years time.

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+1

My "spreadsheet" assumes that anyone with savings won't receive a bean by the time I retire - 15/20 years time.

I'm with you. Even though I'm contributing plenty I'm planning on receiving the grand total of f*** all state pension. I think it will become means tested much like the Australian system idc.

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+1

My "spreadsheet" assumes that anyone with savings won't receive a bean by the time I retire - 15/20 years time.

Damn. I'll have to blow all the savings on a house so I'm entitled to state benefits.

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Damn. I'll have to blow all the savings on a house so I'm entitled to state benefits.

That's my lurking fear. I have not leveraged up and played in the great property bubble of the last 15 years, but instead saved and invested.

In 20 years time there will be loads of late middle aged people with interest only mortgages and little equity in their houses. These types will, have Mewed at every available opportunity to afford new cars, expensive holidays etc. These same people will have not made any pension provision ("this house was my pension"). Clearly this situation will not be their fault!

Some clever politician will find a way to spin it that those with pensions should bail out those without as "we are all in it together".

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What average life expectancy (or years beyond 65) is now used to price annuities?

Every company selling annuities will have different views on the tables to use - no hard and fast rules (and I don't work in the annuity selling industry so no direct experience).

But around 24/25 years for a M/F currently aged 65 would be in the right ball park.

And for someone currently 40, around 27/28 (M/F) years from age 65.

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Every company selling annuities will have different views on the tables to use - no hard and fast rules (and I don't work in the annuity selling industry so no direct experience).

But around 24/25 years for a M/F currently aged 65 would be in the right ball park.

And for someone currently 40, around 27/28 (M/F) years from age 65.

Thanks, so current rates are pretty poor. I assumed it was higher than 24/25.

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Indeed. Hence why its hard not to be sceptical that this rather tasty benefit will be watered down horribly before many of us ultimately receive it.

State pension is financed out of current revenues so the bond yield has little to do with it. In fact, low bond yields (as now) mean its cheaper to fund the state pension.

For private pensions, low yields obviously = higher capitalisations so its largely a wash as bonds are liquidated/mature to meet liabilities i.e. annuity holders die.

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Of course, one knock-on effect of NIRP, Greek default, followed by the rest of the PIIGS, possibly with some BRICS defaults as well would be pension fund losses, which might undo the sums of those clever actuaries?

An alphabet soup of pensions not quite as billed?

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