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gruffydd

"problems With Annuities Will Cause Crash"

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Spoke to a senior guy with a large financial firm today who predicted that because of probs with annuities, house prices were guaranteed to fall substantially. Then he was off and I didn't have time to discuss the issue any further with him.

Can someone please explain.......

Edited by gruffydd

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Spoke to a senior guy with a large financial firm today who predicted that because of probs with annuities, house prices were guaranteed to fall substantially. Then he was off and I didn't have time to discuss the issue any further with him.

Can someone please explain.......

Personally, haven't the foggiest :blink:

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Annuities are the financial instruments which people use when they don't have a final salary pension scheme.

You buy an annuity with the pot of money which is in your (non-final salary) scheme. The annuity then pays you an income until you die. The amount of income which an annuity pays is dependent on interest rates. The low interest rates at the moment mean that annuities are paying really crap money.

A large wave of people (the older baby boomers) are going to try and retire in the next few years. The oldest baby boomers are 60 this year.

Either interest rates will have to rise to support the annuity income of the baby boomers, or the baby boomers will have to sell their property (i.e. downsize) to fund their retirements, flooding the property market with houses.

Either way, these are bearish forces on the housing market.

frugalista

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Hmmm, initially I read this thread and dismissed it, but this could be quite an interesting point. A lot of retired people have probably been holding onto their property as it has been incessantly rising in value - why sell it if it's worth more every month, even if it's too big to maintain. Many have probably been thinking they could sell up in future. It also looks like many have been MEWing, which I find astonishing. So how will these people react in a downward market, particularly with such poor annuity rates as currently? If you consider "my house is my pension", and that starts going down in value at an alarming rate along with poor annuities, then it wouldn't be illogical to try to sell quickly to salvage what they can. So I suppose this could mean a flood of retirees down-sizing should HPI turn.

I'd always assumed it would be the BTL brigade (or rather the late-comers to BTL) that would head for the exit sharpish, but retirees could be tempted to do so. So it's possible you'd have BTL's with their 2-bed "luxury" apartments and retirees with their large houses exiting simultaneously.

Does that mean the retirees would buy the apartments? :ph34r::lol:

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A large wave of people (the older baby boomers) are going to try and retire in the next few years. The oldest baby boomers are 60 this year.

Ouch, lots of people forced to buy annuities all at the same time, that's really going to help yields <_<

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I think it is linked to the fact that pension funds have to buy gilts in order to cover their pension obligations.

Low interest rates have meant that gilts are paying less interest, which in turn means the funds have to buy more gilts to cover their liabilities. However, this is generating huge demand for them, pushing up their price, and lowering their yields which leads to pension funds having to buy even more gilts, and round and round and round. I think this is why Gordon Browntrousers made provision in the budget for more long dated gilts.

Either gilt rates (interest rates) rise, or pension funds will offer lower returns when you buy your annuity, meaning pensioners will receive less income for the same sized pension fund when they buy their annuity.

http://money.guardian.co.uk/pensions/story...1690892,00.html

So I guess interest rates will have to rise? Or pensions will have to fall? Which will the baby boomers want after they have paid off their mortgage? Neither I suspect, tough choices ahead.

Pensions will be the next rip off we have to suffer. You may be better off investing your pension money yourself in future. Will there even be a state pension when I retire? Maybe, but not till you're 75!

But this is only my limited understanding of the situation.

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So it's possible you'd have BTL's with their 2-bed "luxury" apartments and retirees with their large houses exiting simultaneously.

Good point, and one that has been made before but largely overlooked.

Who, indeed, will have the money to buy these big houses when the boomers want to downsize? The orderly procession up the property ladder has stalled; the gaps between the rungs are simply too large. If you are in your thirties and have just taken on £250K of debt to buy a miserable flat how are you ever going to afford the 4 bed detached in your forties without inflation to erode the original mortgage debt and with no wage push to inflate your earnings?

I suspect that most activity in the sales of big houses is now confined to 'like for like' sales; in other words people moving from one house to another similarly sized house - transferring inflation from one to the other, but at no additional cost other than the cost of moving.

Big houses - who will possibly afford them in the future?

Edited by Red Baron

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I've had a think about this and I think it's way off the mark. Sure the annuity rates have been poor (for the last few years), but the boomers are mostly in final salary schemes.

I can't see this having much of a downward effect on HPI however much I wish it would.

NDL

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I've had a think about this and I think it's way off the mark. Sure the annuity rates have been poor (for the last few years), but the boomers are mostly in final salary schemes.

I think you might be right. So, the next question is, how are final salary schemes funded? -- Genuine question.

frugalista

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Ouch, lots of people forced to buy annuities all at the same time, that's really going to help yields <_<

Ooooo...a winner!!!!

All that retirement money wants a return. But who will pay the return it wants? The demographics support low low rates, to encourage that money to be spent rather than saved.

Low, low rates my friends, lower than you think possible.

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I think you might be right. So, the next question is, how are final salary schemes funded? -- Genuine question.

frugalista

Well, if you believe conventional wisdom they are underfunded to the tune of £60bn.

To answer your question though, they hold all sorts of asset classes from property to equities and bonds.

I am of the opinion (which goes very much against the grain) that there was no need to close final salary schemes to new entrants. In fact I would argue that final salary schemes, like the property market, NEED new blood.

The way it worked in the old days when everyone had access was this: The company contributed each month and normally the employee contributed each month. The liabilites of the scheme, pensions, deaths etc would be paid out of this money. On an average month they'd have a little left over which would be invested in assets. On a bad month they may have to sell some assets to cover liabilities, but typically, they'd have a surplus to invest.

Picture it now with no new entrants and proportionately more and more claiming each month. They are more likely to have to sell assets to cover liabilities. To compound matters even more, companies have closed these schemes to new entrants at the very worst time. ie. When equities are low. They have therefore sold more assets at a low price to cover their liabilities and now have missed out on substantial growth pn the stock market over the last three years. It's crazy.

Of course, many will come on and slate me for this opinion, but I remain to be convinced. Apologies as that went on longer than I intended! Hope it helped though.

NDL

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All that retirement money wants a return. But who will pay the return it wants? The demographics support low low rates, to encourage that money to be spent rather than saved.

Low, low rates my friends, lower than you think possible.

Actually you may be right, but also expect massive inflation on the supply side including commodities and asset prices, however I'd rather venture commercial property given that consumers will suffer from low wage inflation.

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Well, if you believe conventional wisdom they are underfunded to the tune of £60bn.

To answer your question though, they hold all sorts of asset classes from property to equities and bonds.

I am of the opinion (which goes very much against the grain) that there was no need to close final salary schemes to new entrants. In fact I would argue that final salary schemes, like the property market, NEED new blood.

The way it worked in the old days when everyone had access was this: The company contributed each month and normally the employee contributed each month. The liabilites of the scheme, pensions, deaths etc would be paid out of this money. On an average month they'd have a little left over which would be invested in assets. On a bad month they may have to sell some assets to cover liabilities, but typically, they'd have a surplus to invest.

Picture it now with no new entrants and proportionately more and more claiming each month. They are more likely to have to sell assets to cover liabilities. To compound matters even more, companies have closed these schemes to new entrants at the very worst time. ie. When equities are low. They have therefore sold more assets at a low price to cover their liabilities and now have missed out on substantial growth pn the stock market over the last three years. It's crazy.

Of course, many will come on and slate me for this opinion, but I remain to be convinced. Apologies as that went on longer than I intended! Hope it helped though.

NDL

So, as I understand it, the final salary schemes will now just gradually burn through their assets in order to meet their liabilities, then finally they will all be wound up in about 30 years or whatever.

Meanwhile the entire private sector workforce is gradually converting on to money purchase schemes. I guess these will gradually buy up the assets sold by the old final salary schemes.

Still dunno what effect this will have on house prices.

frugalista

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I caught the last 20 seconds of a radio interview where a financial advisor seemed to be implying that annuities would soon be able to be passed on (i.e. inherited) as an asset when the holder died......does anyone know if this is true......I suspect that this would lead to a massive increase in the amount of cash in circulation, or do I just not get it?

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I caught the last 20 seconds of a radio interview where a financial advisor seemed to be implying that annuities would soon be able to be passed on (i.e. inherited) as an asset when the holder died......does anyone know if this is true......I suspect that this would lead to a massive increase in the amount of cash in circulation, or do I just not get it?

At the moment you buy an annuity with your pot of money. Even if you die one month after that annuity starts, the insurance company gets to keep all your pot. Of course you can buy things like 5 year guarantees which means you can guarantee a minimum of 5 years of payments with the balance paying to your estate up to the five year period.

What the advisor was alluding to is proposals that mean that the pot not used so to speak when you die, will be returned to the estate. You can bet there'll be tax to pay on it though.

All in, the money either goes to the insurance company, the estate or the taxman. Therefore I don't see any increase in cash in circulation.

If this is adopted it'll likely lead to even smaller annuities as the insurance cos will want to get some cash somehow!

NDL

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I caught the last 20 seconds of a radio interview where a financial advisor seemed to be implying that annuities would soon be able to be passed on (i.e. inherited) as an asset when the holder died......does anyone know if this is true......I suspect that this would lead to a massive increase in the amount of cash in circulation, or do I just not get it?

Hrm, by definition that wouldn't be an annuity! They couldn't really price it correctly, unless they adopted fixed terms.

However, come the new pension arrangements coming into force in the next few days I believe you will no longer be forced to buy an annuity when you retire, you will be able to receive a lump-sum that you will be able to invest or pass on as you wish, given that a normal savings account currently pays out higher yields than gilts this will be a good thing.

Edited by BuyingBear

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However, come the new pension arrangements coming into force in the next few days I believe you will no longer be forced to buy an annuity when you retire, you will be able to receive a lump-sum that you will be able to invest or pass on as you wish, given that a normal savings account currently pays out higher yields than gilts this will be a good thing.

If that's true (i.e. the amount you can withdraw as a lump sum goes from the current 25% to 100% of your pension pot), then saving via money purchase pensions becomes almost a total no-brainer.

Are you sure that's what's planned?

frugalista

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Actually you may be right, but also expect massive inflation on the supply side including commodities and asset prices, however I'd rather venture commercial property given that consumers will suffer from low wage inflation.

I'm more inclined to think that an ageing population means reduced demand, indeed recession or even depression, as older people reduce their activity to match their lower incomes in retirement.

I caught the last 20 seconds of a radio interview where a financial advisor seemed to be implying that annuities would soon be able to be passed on (i.e. inherited) as an asset when the holder died......does anyone know if this is true......I suspect that this would lead to a massive increase in the amount of cash in circulation, or do I just not get it?

My feeling is why buy an annuity & go off & die? Why not buy property, receive a return on it & pass it off in your will?

It makes perfect sense IMO.

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My feeling is why buy an annuity & go off & die? Why not buy property, receive a return on it & pass it off in your will?

It makes perfect sense IMO.

With a face like that it does indeed!

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My feeling is why buy an annuity & go off & die? Why not buy property, receive a return on it & pass it off in your will?

It makes perfect sense IMO.

Okay, persons 1 and 2 earn the same money and save at the same rate.

Person 1 saves over their working life. They put their *taxed* income into some investment or other and cash it in when they retire.

Person 2 saves over their working life. They put their income *with full tax relief* into a money purchase pension and make the same investment through that pension as person 1 did with their non-pension money.

Person 1 is going to have say £300,000 in cash when they retire.

Person 2 is going to have say £600,000 in their pension scheme when they retire. This is because person 2 got tax relief on contributions, and this tax relief compounded over many years. In addition income and growth on the pension fund was mostly untaxed, unlike person 1's savings plan.

It is quite possible I am being overly generous to Person 1 here.

Person 1 buys a property with their £300k, which generates an income of say 20k a year after expenses.

Person 2 must use at least 75% of the pension pot to buy an annuity. That's the current rule. So, person 2 takes out £150k as a lump sum, and buys an annuity with the remaining £450k which pays £31.5k a year in income (annuity rates are currently around 7%). The annuity will be index linked so will rise with inflation just as the rental income will.

Who has the better deal? Initially at least Person 2 can have a better lifestyle than Person 1. Not only that but Person 2's income is guaranteed to rise, unlike Person 1 who might be unlucky if rental inflation does not keep up. However, Person 1 has an asset worth 300k to pass on, whereas person 2 only has 150k cash. On the other hand, person 2 can invest that 150k cash in anything, whereas person 1 must stick with property.

On balance I'd say person 2 is better off, especially if they survive more than say 10 years beyond retirement.

frugalista

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Not to forget risk and diversification.

Putting all your retirement eggs in a house... what happens if rental laws change? If the area gets chavvified? If the house has a fire? Plus, you are tied implicitly to the UK economy (as will be renting it out to UK residents)

Pension fund is diversified internationally & across asset classes. Much less risky.

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Okay, persons 1 and 2 earn the same money and save at the same rate.

Person 1 saves over their working life. They put their *taxed* income into some investment or other and cash it in when they retire.

Person 2 saves over their working life. They put their income *with full tax relief* into a money purchase pension and make the same investment through that pension as person 1 did with their non-pension money.

Person 1 is going to have say £300,000 in cash when they retire.

Person 2 is going to have say £600,000 in their pension scheme when they retire. This is because person 2 got tax relief on contributions, and this tax relief compounded over many years. In addition income and growth on the pension fund was mostly untaxed, unlike person 1's savings plan.

It is quite possible I am being overly generous to Person 1 here.

Person 1 buys a property with their £300k, which generates an income of say 20k a year after expenses.

Person 2 must use at least 75% of the pension pot to buy an annuity. That's the current rule. So, person 2 takes out £150k as a lump sum, and buys an annuity with the remaining £450k which pays £31.5k a year in income (annuity rates are currently around 7%). The annuity will be index linked so will rise with inflation just as the rental income will.

Who has the better deal? Initially at least Person 2 can have a better lifestyle than Person 1. Not only that but Person 2's income is guaranteed to rise, unlike Person 1 who might be unlucky if rental inflation does not keep up. However, Person 1 has an asset worth 300k to pass on, whereas person 2 only has 150k cash. On the other hand, person 2 can invest that 150k cash in anything, whereas person 1 must stick with property.

On balance I'd say person 2 is better off, especially if they survive more than say 10 years beyond retirement.

frugalista

How about person 3 who puts money into several properties over his working life getting the benefit of leverage and rental stream from day one? TTRTR for instance? 600k in Joe average's pension pot is way overestimating :)

Edited by mercsl

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I think it is linked to the fact that pension funds have to buy gilts in order to cover their pension obligations.

Low interest rates have meant that gilts are paying less interest, which in turn means the funds have to buy more gilts to cover their liabilities. However, this is generating huge demand for them, pushing up their price, and lowering their yields which leads to pension funds having to buy even more gilts, and round and round and round. I think this is why Gordon Browntrousers made provision in the budget for more long dated gilts.

Either gilt rates (interest rates) rise, or pension funds will offer lower returns when you buy your annuity, meaning pensioners will receive less income for the same sized pension fund when they buy their annuity.

http://money.guardian.co.uk/pensions/story...1690892,00.html

So I guess interest rates will have to rise? Or pensions will have to fall? Which will the baby boomers want after they have paid off their mortgage? Neither I suspect, tough choices ahead.

Pensions will be the next rip off we have to suffer. You may be better off investing your pension money yourself in future. Will there even be a state pension when I retire? Maybe, but not till you're 75!

But this is only my limited understanding of the situation.

This is correct, all the money that the Government has forced to be invested in long dated gilts is depressing yields and has held down long term interest rates artificially, hence all those low fixes that are currently available. Unfortunately this is diverting pension fund money away from investment in other, productive parts of the economy - this investment is now at an all time low. This is very bad for the economy going forward and will have to be remedied by either changing the rules or increasing the supply of long dated gilts. Either way long term interest rates will be going higher in future, the last few years have been an exceptional period.

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  • 302 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% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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