I have recently started thinking about what kind of annuity I might need
when I eventually retire in 5 or 10 years.

One of the main kinds of product seems to be a 'level' annuity. This seems
to pay a fixed rate, with no increases for inflation.

My question is: Why would anyone buy this product? It seems to guarantee an
income that declines in real terms. A similar point applies to products
that increase at a pre-defined rate (eg 3% per year). No-one knows what
will happen to inflation over the years. It is not so long since it was
over 10%.

Chris Gordon-Smith
www.simsoup.info

"Chris Gordon-Smith" wrote
I have recently started thinking about what kind of annuity
I might need when I eventually retire in 5 or 10 years.

One of the main kinds of product seems to be a 'level' annuity.
This seems to pay a fixed rate, with no increases for inflation.

My question is: Why would anyone buy this product?

Because they want more income earlier & don't mind getting less later?

"Chris Gordon-Smith" wrote
It seems to guarantee an income that declines in real terms.

Yep, but you get more initially than you would have if it increased.

Tim wrote:

"Chris Gordon-Smith" wrote
I have recently started thinking about what kind of annuity
I might need when I eventually retire in 5 or 10 years.

One of the main kinds of product seems to be a 'level' annuity.
This seems to pay a fixed rate, with no increases for inflation.

My question is: Why would anyone buy this product?

Because they want more income earlier & don't mind getting less later?

"Chris Gordon-Smith" wrote
It seems to guarantee an income that declines in real terms.

Yep, but you get more initially than you would have if it increased.

Indeed, but why would one expect required income to reduce?

Chris Gordon-Smith
www.simsoup.info

"Chris Gordon-Smith" wrote
I have recently started thinking about what kind of annuity
I might need when I eventually retire in 5 or 10 years.

One of the main kinds of product seems to be a 'level' annuity.
This seems to pay a fixed rate, with no increases for inflation.

My question is: Why would anyone buy this product?

"Tim" wrote:
Because they want more income earlier & don't mind getting less later?

"Chris Gordon-Smith" wrote
It seems to guarantee an income that declines in real terms.

"Tim" wrote:
Yep, but you get more initially than you would have if it increased.

"Chris Gordon-Smith" wrote
Indeed, but why would one expect required income to reduce?

Who says one would?

On Sun, 07 Mar 2010 14:41:55 +0000, Chris Gordon-Smith
wrote:

I have recently started thinking about what kind of annuity I might need
when I eventually retire in 5 or 10 years.

One of the main kinds of product seems to be a 'level' annuity. This seems
to pay a fixed rate, with no increases for inflation.

My question is: Why would anyone buy this product? It seems to guarantee an
income that declines in real terms. A similar point applies to products
that increase at a pre-defined rate (eg 3% per year). No-one knows what
will happen to inflation over the years. It is not so long since it was
over 10%.

Chris Gordon-Smith
www.simsoup.info


Because the extra cost of an indexed annuity means that it takes
something like 15-20 years before the indexed annuity provides a total
return exceeding that of a flat annuity assuming an inflation rate of
3%. Try it out on a spreadsheet.

So if you are living partly on an annuity and partly on your savings
higher income earlier means less out of savings earlier and therefore
more time to provide greater investment growth.

Of course if you had an enormous pension pot it could well be sensible
to go completely for an indexed annuity. But most people arent so
lucky.

Mike
--
Mike Bending

Mike Bending wrote:

On Sun, 07 Mar 2010 14:41:55 +0000, Chris Gordon-Smith
wrote:

I have recently started thinking about what kind of annuity I might need
when I eventually retire in 5 or 10 years.

One of the main kinds of product seems to be a 'level' annuity. This seems
to pay a fixed rate, with no increases for inflation.

My question is: Why would anyone buy this product? It seems to guarantee
an income that declines in real terms. A similar point applies to products
that increase at a pre-defined rate (eg 3% per year). No-one knows what
will happen to inflation over the years. It is not so long since it was
over 10%.

Chris Gordon-Smith
www.simsoup.info


Because the extra cost of an indexed annuity means that it takes
something like 15-20 years before the indexed annuity provides a total
return exceeding that of a flat annuity assuming an inflation rate of
3%. Try it out on a spreadsheet.

So if you are living partly on an annuity and partly on your savings
higher income earlier means less out of savings earlier and therefore
more time to provide greater investment growth.

Of course if you had an enormous pension pot it could well be sensible
to go completely for an indexed annuity. But most people arent so
lucky.

Mike
--
Mike Bending

Thanks for this. My thought so far is that I would live on the annuity, with
any savings being for unexpected expenses / emergencies. It seems to me
that the problem with relying on savings is that there is usually no way to
gauge how fast to spend them (because most people don't know how long they
are going to live).

Chris Gordon-Smith
www.simsoup.info

Tim wrote:

"Chris Gordon-Smith" wrote
I have recently started thinking about what kind of annuity
I might need when I eventually retire in 5 or 10 years.

One of the main kinds of product seems to be a 'level' annuity.
This seems to pay a fixed rate, with no increases for inflation.

My question is: Why would anyone buy this product?

"Tim" wrote:
Because they want more income earlier & don't mind getting less later?

"Chris Gordon-Smith" wrote
It seems to guarantee an income that declines in real terms.

"Tim" wrote:
Yep, but you get more initially than you would have if it increased.

"Chris Gordon-Smith" wrote
Indeed, but why would one expect required income to reduce?

Who says one would?

That seems to be the implication of taking a level annuity.

Chris Gordon-Smith
www.simsoup.info

"Chris Gordon-Smith" wrote in message
...
Tim wrote:

"Chris Gordon-Smith" wrote
I have recently started thinking about what kind of annuity
I might need when I eventually retire in 5 or 10 years.

One of the main kinds of product seems to be a 'level' annuity.
This seems to pay a fixed rate, with no increases for inflation.

My question is: Why would anyone buy this product?

Because they want more income earlier & don't mind getting less later?

"Chris Gordon-Smith" wrote
It seems to guarantee an income that declines in real terms.

Yep, but you get more initially than you would have if it increased.

Indeed, but why would one expect required income to reduce?

Because the older you get the less mobile you become, so there will be less
"pleasure" activities that you can take part in.

The Government will pick up the bill for your increasing health needs, but
it won't pay for your leisure trips.

tim

tim.... wrote:

"Chris Gordon-Smith" wrote in message
...
Tim wrote:

"Chris Gordon-Smith" wrote
I have recently started thinking about what kind of annuity
I might need when I eventually retire in 5 or 10 years.

One of the main kinds of product seems to be a 'level' annuity.
This seems to pay a fixed rate, with no increases for inflation.

My question is: Why would anyone buy this product?

Because they want more income earlier & don't mind getting less later?

"Chris Gordon-Smith" wrote
It seems to guarantee an income that declines in real terms.

Yep, but you get more initially than you would have if it increased.

Indeed, but why would one expect required income to reduce?

Because the older you get the less mobile you become, so there will be less
"pleasure" activities that you can take part in.

The Government will pick up the bill for your increasing health needs, but
it won't pay for your leisure trips.

tim


Thanks. Hmmm. I don't think there is any ongoing guarantee that the
gevernment will pickup the bill for health needs. Even where they do,
they currently only provide what they consider to be essential.

My preference would be to keep the *real* income level. If this means
not going on a world cruise in the early years of retirement then I
can live with it.

Chris Gordon-Smith
www.simsoup.info

"Chris Gordon-Smith" wrote
I have recently started thinking about what kind of annuity
I might need when I eventually retire in 5 or 10 years.

One of the main kinds of product seems to be a 'level' annuity.
This seems to pay a fixed rate, with no increases for inflation.

My question is: Why would anyone buy this product?

"Tim" wrote:
Because they want more income earlier & don't mind getting less later?

"Chris Gordon-Smith" wrote
It seems to guarantee an income that declines in real terms.

"Tim" wrote:
Yep, but you get more initially than you would have if it increased.

"Chris Gordon-Smith" wrote
Indeed, but why would one expect required income to reduce?

"Tim" wrote:
Who says one would?

"Chris Gordon-Smith" wrote
That seems to be the implication of taking a level annuity.

How does taking a level annuity imply that required (real) income is
expected to reduce?