Guarantees

When I first came into the business ( a long time ago) every pension was set up to be paid monthly and guaranteed for five years. This had some logic – retirement age was 65 and life expectancy three score years and ten for a male.

But life has moved on and I still wonder at the amount of five year guarantees that are purchased. In most cases for a very small reduction in income a ten year guarantee can be bought which is much more in keeping with today’s longer life expectancy. That is why when people go to our web site we  initially give a variety of quotes including ten year guarantee. www.annuitydirect.co.uk

To Defer or Not

I am becoming concerned at the amount of publicity that seems to be around suggesting that people should defer their retirement income and buy an annuity when they are older. This seems to imply that the income will be higher as the individual will be older. I think this is an argument that is too simplistic for a number of reasons.

1. It assumes that rates will be higher. This might be a high risk strategy if solvency 2 becomes reality.

2. It ignores the lost income that would have been paid during the deferral period. To look at this properly a cash flow analysis needs to be carried out which will give an idea of how long some one will have to live beyond a deferred annuity purchase date to recoup the lost income and also calculate the growth required on the pension fund to reduce the break even point.

This is where the Living Time/LV= product can be useful in that the final annuity purchase decision can be delayed withiout losing income. BUT there is no guarantee that the income can continue as it will depend on rates available in the future.

New Product

Interesting to see LV= launch their fixed term annuity. This is similar tio the Living Time product. My initial reaction having scanned just a couple of quotes is that the risk of income falling at the end of the term is not sufficiently visible. They allow income to be flexed up to 120% of the maximum allowed for unsecured pension but the temptation to take maximum income will reduce the amount returned at the end of the term and thus increase the risk of income reducing. I am also concerned that the possibility of falling rates as a result of solvency 2 makes this quite a bit more risky than is immediately apparent.

I hope that LV= is not going to follow the traditional insurer route of getting the highest quote and hang the consequences!!!! I intend that Annuity Direct will look at Living Time which makes an attempt to smooth income at the end of the term by providing a balance bertween income now and maturity value.

Next Generation

The Bank of England’s decision to hold quantative easing could in therory lead to a rise in bond yields and therefore annuity rates were it not for the massive threat from Europe of solvency 2. I really am at a loss on this. For hundreds of years UK insurers have successfully managed their investments with very rare financial failure. Why do we now need Eurocrats to come along and reinevent what to date has been a perfectly round wheel? The wheel they are inventing is square and will have a massive impact on the next generation of pensioners who will be worse off as a result of  European interference in our highly successful insurance industry.

Crystal Balls

As part of my thinking I have been mulling over the likely direction of annuity rates in future. They rely on interest rates and the amount of time the actuaries believe we will live for. Over the last ten years longevity has been increasing and interest rates falling with the result that there has been a ‘double whammy’ impact. Everyone is forecasting lengthening lifespans and so the big question is the direction of interest rates in the future. But the wild card is whether solvency 2 will offset any general rise in rates.

This for me is the biggest issue and the jury is out. I shall continue to ponder what actions should be taken now.