Stakeholder Pension fund

"Ronald Raygun" wrote

I think the above applies more for higher rates of return; for lower rates of return, it could turn the other way around [also, again it applies more to younger ages - older people will find annuities probably pay out more] :-

If underlying returns are 10% (say), then if you have 1000 capital, you could invest this to provide 100pa for every year into the future (including after your death). Now, if you are going to live for a very long time (ie you are young) then the pure annuity rate (just allowing for mortality, without any expenses/profit involved) will provide only just over

100pa - which when reduced by expenses&profit could easily be below 100pa as you say.

However, now suppose that underlying returns are 3% (say). Each 1000 invested provides just 30pa. You'd need to live for well over 33 years to see a better return on that than buying an "expenses/profit - free" annuity. Even if you allow 10% of purchase price for expenses&profit, then the annuity factor would need to be over 30 to get less than 30pa from the "competitive" annuity - which for anyone aged even 40+ is extremely unlikely.

For anyone over the age of about 70, the annuity factor is likely to be less than 10 under any circumstances - even allowing for expenses&profit. So you'd need a market return of at least 10%pa to keep up.

"Ronald Raygun" wrote

Well, the usual investment strategy by the annuity company would be to try to invest in "matching" fixed-interest gilts (or possibly IL gilts for an IL annuity) - if they can find some with a suitable term etc. Given that this is possible (gilt terms being available up to 30 and not many annuitants living longer than that), the annuity price would be calculated based on the returns on those gilts - which (when held to maturity) is of course guaranteed.

Hence not (necessarily) any risk to the annuity office.

Yes - as I said in my earlier post, "the only benefit of a pension policy is the tax-free lump sum - the one that some commentators say the government should remove(!)".

I doubt it. The TFLS is (I believe) the best concession for pension policies (at the moment).

Reply to
Tim
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"Ronald Raygun" wrote

That's a neat way of thinking about it! :-) Where'd you get the idea from?

Reply to
Tim

True enough. But most of your personal allowance will be taken up by the basic state pension anyway, won't it?

Reply to
Ronald Raygun

Drawdown is an option, provided you don't live too long, and you have lots of money available.

Reply to
Jonathan Bryce

"Jonathan Bryce" wrote

Hmmm - cases of drawdown I've heard about seem to have had very high expense ratios - and funds have been depleted very quickly. And, of course, you still need to buy that annuity once you get to age 75!

Reply to
Tim

I'll bet you wouldn't be saying that if the baying crowd demanded that while we're at it we should include endowment salesmen too, and of course everyone who has ever been a pension or endowment salesman.

Let him who is without sin...

Reply to
Ronald Raygun

And at 75, the annuity will be relatively more expensive than it would have been 10/15 years earlier because of "mortality drag".

Reply to
Gareth Kitchener

"Ronald Raygun" wrote

I'm sure you know the answer to this already - its *mortality* risk! They may be able to cover the *investment return* risk by buying gilts themselves, but they have no way to cover the risk that they will live too long ...

"Ronald Raygun" wrote

What indeed! We might be about to find out soon, with many pension funds switching from equities to gilts lately ...

"Ronald Raygun" wrote

I suppose it might be interesting for the state to broaden their "sideline" in insurance & pension provision - but I suppose that "the gilts rigmarole" does separate-out the "conversion of a lump sum now into income into the future" side of annuities from the "mortality risk + administration" side, with the former currently being dealt with by the state (gilts) and the latter being dealt with by the annuity company.

"Ronald Raygun" wrote

I think you'll find that life offices (for annuities) and pension funds (for pensioners) are probably (at least one of) the biggest investors in gilts...

Reply to
Tim

Of course they have, by living below their means and minimising drawdown. They use a wide spread of maturity dates, and at each maturity they roll the proceeds over into new ones.

Or they may prefer to live above their means and when it's all gone just call it a day and throw themselves either off a cliff or on the mercy of the welfare state.

Reply to
Ronald Raygun

I feel that property is more likely to give you what you need in your old age along with flexibility before then.

I don't trust pension funds and I dont trust the government.

Peter Saxton from London snipped-for-privacy@petersaxton.co.uk

Reply to
Peter Saxton

How can the average man in the street 'carefully choose' (with appropriate advise, if necessary) a UT/OEIC based ISA that consistently outperforms the index over a 20 - 30 year period ? All that I've seen so far suggests they can't. I have a feeling that high yield and value investing may do, but I've yet to see any long run statistics.

Daytona

Reply to
Daytona

"Daytona" wrote

Why do they need to outperform the index? Who says a Stakeholder would necessarily do that anyway?

Reply to
Tim

?? If there's no matching to be done, you don't *need* to know how long to match to.

What extra money? By "live belowe their means" I simply meant to live frugally off the interest without needing to draw down capital.

If you want to optimise drawdown, yes. If you reject drawdown, no.

I doubt it. In any given year, yes. In total, no.

No, but they're a convenient vehicle and have the (dis)advantage of having interest rates fixed for (their) life, unlike high street bank deposits or shares in ICI.

Reply to
Ronald Raygun

They don't need to, but I, for one, would consider it desirable.

Dunno - I didn't.

Reply to
Daytona

I'm quite happy to accept the proposed amendment to my proposal.

Reply to
john boyle

In message , Ronald Raygun writes

Which is what has happened recently driving the yield lower.

Reply to
john boyle

Go to a decent IFA and buy through a fund supermarket, like Skandia, for example and split the funds between managers and switch as necessary. Nobody in their right mind would stay with the same manager for 20-30 years. And why benchmark an index?. Absolute performance is what we are after.

Having said that, if you look at unitised 'pension' funds of the type offered by Pension Offices you will see that a far greater proportion fail to beat the FTSE all share than UTs. Pension Offices are generally pretty crap at investing money and the majority of pension salesmen dont address the investment element properly and the poor buggers dosh ends up in the company's 'balanced' or 'managed' fund or even 'with profits'. So even a poorly performing UT will beat a main stream Pension Fund anyday.

Hhhmm,,,,

Reply to
john boyle

In message , Tim writes

No, it would be 11+ years before the cumulative effect of the lower initial payments caught up with the level annuity.

If forced to buy an annuity you'd be better off saving the difference between the level annuity income and the index linked annuity, which would be quite a lot, and shoving into an equity based ISA upon which you could draw in later years.

Reply to
john boyle

Am I right in thinking that the value of the gilt edged market is some times larger than that of the equity stock market?

Reply to
Terry Harper

Are you sure about that? How do you define "more expensive"?

Reply to
Terry Harper

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