Annuities Explained & Is There A Better Option?
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- Опубліковано 20 тра 2024
- In this video, I take a detailed look at annuities. What they are, the different types, why we might want to buy them in the first place and their pros and cons. I will also give you an interesting alternative to buying an annuity that could help save you money but still guarantee your income.
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Timestamps
00:00 Introduction
00:27 What is an annuity?
02:40 Types of annuity
06:46 Annuity rates
11:28 Fees
13:20 Do It Yourself
15:06 Pros & Cons
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DISCLAIMER
All information is given for educational purposes and is not financial advice. Ramin does not provide recommendations and is not responsible for investment actions taken by viewers. Figures that are quoted refer to the past and past performance is not a reliable indicator of future results.
Brilliant video Ramin, we need more financial education & literacy for the masses. It’s criminal for these companies to be charging such high rates for fees.
👍Confirmed my view on annuities: Inflexible, illiquid, very high fees, opaque fees, complex variations so difficult to compare.
I will remain a DIY investor and not waste my time and money on annuities.
The State Pension seems like a straight forward index linked annuity to me anyway.
Thank you @paulk5986
The world needs more creators like you.
Thank you @TatumLambino
Ramin if you get generic comments like these they are from spam/ comment mining/like mining outfits.
As you become a lot older it might become more difficult and stressful to look after your own investments, technology plays a part too.
The problem with the DIY approach is that to cover your expected expenses for when you are 85, for instance, you have to buy the whole amount in your bond ladder. The insurance company, however, can see from life expectancy that they will only have to pay about half the people in the annuity pool the payment for age 85, because the other half will have died by then. So the insurance company needs to allocate less assets to the longevity tail than you do, so can offer a better payout overall. Whether this compensates for the fees or not, you would have to do the sums at the time you came to consider an annuity vs a bond ladder. But some US analysis of portfolios of stocks, bonds and annuities found that the efficient frontier was for portfolios of stocks and annuities, and no bonds at all.
Once I am 69 years old I am my government's problem. I want income until then. After that they have to feed or euthanase me. Can't find annuities that start paying before you're 55 or that pay more than what you'd get by investing the money by yourself. I didn't compare rates now but that was the reality when interest was low.
The probem with the DIY option is that as you get older you will become less capable of dealing with complex transactions. If you suffer from dementia, how are you going to manage a portfolio of bonds?
If your unlucky enough to catch dementia, your gonna either depend on your children to manage your finances, or forfeit your annuity income to the government when you land in nursing home. And your gonna leave them sorting out your bad investment.
Im dealing with this now. My mom has a trash annuity which was a trash investment when she bought it, and still trash today. She would have been much better off today if she had put this money in the s&p500. With her annuity, she's lost out on $502k of profit in the 9 years she's held it. On a $200k annuity. Even in normal market conditions, she'd still be down $130k. Super mad at her financial investor that guided her into this negative growth garbage. Fired all of them and moved her assets with a quickness. This was a very expensive mistake for her.
That is a key that most people miss.
Superb, clear and free public information. You deserve to have a very successful business
Thank you so much 🙂 @chrisyates2591
Annuities are the reason I started to self invest - still can't believe that such opaque and expensive instruments are allowed. Guess I'm biased! 😆
I feel the same way. They don't actually take the risk and they pay less and they have restrictions like not allowing you to retire before 55 years of age.
They’re just an option nowadays. Good rates at present. Way better than a safe withdrawal rate from a fund portfolio
@@TheSimArchitect What risk, surely a drawdown is more risky. You could get an income for life at the moment, annuity rate of about 5.5% for a 65 Yr old. They reckon the safe withdrawal rate for drawdown is 4% plus drawdown has the added risk of running out of money
@@fredatlas4396 Yes but not if you want that annuity to be fully transferred to a spouse for instance and want index linking in any form. With Drawdown a partner can be sure to continue to draw what they need from that pot, or even for kids to be able to inherit what's left.
@@fredatlas43965.5% on the initial amount, or inflation adjusted???
What also concerns me is if I hand over a load of money and the annuity company goes bust! Just a thought, but when I invest in a fund it might have lots of different investments and a far lower risk?
There's no easy way. Personally I'm not comfortable with handing over 100k (that is difficult to back out of) in exchange for an income stream. I manage with bond mutual funds. For every US 10k I put into HY, Investment grade, and UST funds, I earn 64, 35, and 24 USD per month respectively or 123 a month. I can sell the fund at any time or swap into a different fund i.e. shift some to stocks on market downturns if I so choose. Having a little more control lets me sleep better. Not much better, but better. Thanks for the video Ramin.
I’m not sure you made enough emphasis on the absolute loss of capital (UK) with an annuity. With a bond ladder or stocks, at least you always have access to the capital whether it grows or shrinks.
It’s fair to say there are lots of fees in an annuity however the payment you get is net of all of them, so just compare the net payment vs other options
I just got thru watching another video on SPIA's. Claiming there are no annual fees for SPIA's.
As always, excellent content - Short fixed term annuity quote - just looked a 3 year plan to bridge a gap from 64 to 67. Putting 270k in it will pay £11,700 a year for 3 years and pay back 270k at the end of term! Is this a no brainer?
Very informative as usual - thanks Ramin !
I looked at annuities and decided it was gambling with my pension that I could pass on to my wife and daughter should I die before it runs out.
The 10 year garantee would reduce that risk a little bit but not enough for my liking,
the fees are really high too and I didnt realise that so thanks for convincing me even more NOT to do annuities.
A bond ladder is pretty straightforward and I am considering doing that BUT Im leaning more towards just keeping a healthy emergency fund in short term bonds and keeping the rest invested, then I draw from investments when they are good and if they crash I'll draw from the bonds.
However IF rates ever go up to 8% or more I would probably go 100% into a bond ladder.
Wise to keep well away from a annuity imo
Biggest rip off going
And the other problem not mentioned that you cannot pass on your wealth to your children if you hand over the pension pot to an insurer
Excellent video thanks Ramin! With regards to fees, should the initial one off cost of the annuity be compared against the cumulative sipp fees that would accrue over a long retirement if one stayed invested?
In Singapore, we have our state sponsored annuity called CPF Life. At 55, a chunk of our provident fund (CPF) is channeled to this annuity which starts payout at 65 or if you choose to delay it till 70. Delaying it will have increased monthly payouts since the amount is allowed to grow further. Payments can be escalating or constant. We are allowed to choose the payment styles. It is a lifetime annuity. Annuities are viewed as "longevity insurance" in Singapore.
Blimey! Thanks Ramin, knew about annuities, but not the sky high fees. Can't say I'm surprised; they are a feature of the pension industry... thought provoking video 😊
Great video Ramin thank you🤞
Although we would never consider a lifetime annuity we are seriously considering a 5 year fixed term annuity to bridge my wife (who has just finished work) for the 5 years to state pension age.
Figures about 3 weeks ago with Canada Life came out as follows;
Pension pot 465k minus PCLS £116,250 (for us to invest) leaves £348,750 which buys 5 years fixed income of £12,570 pa and at the end of the 5 years £386,000 back as a guaranteed maturity value. Ok, appreciate it’s 5 years at level income.
The alternative would be FAD and we probably wouldn’t take the PCLS but leave it invested in the pension. However, we are nervous about where markets may go and the peace of mind (for 5 years at least) until state pension age with a FTA is quite attractive. The only begrudging thing would be the nearly 6K fee for an IFA to arrange it, wish we could just go direct to Canada Life!!
I might add this is not our only income as I have a reasonably good DB pension and get full state pension in early 2025.
Thanks for all the excellent explanations. I have watched lots of your videos and have learned a lot. Thanks again. Tony.
Glad to help @tonyoshea3
A genuine question as a non smoker/drinker would it be beneficial to start smoking and drinking before I go for an annuity ?
Can you please make a video on the sell off of US bonds by BRICS?
Excellent summary, thank you
Glad it was helpful! @nigelbriggs6880
Hi. Thanks for a very informative video - as always. I think it's worth mentioning one of the biggest cons of annuities here. If you've built up a large pot of money for your retirement by working and saving hard and you buy an annuity, that pot of money is gone. You will enjoy a guaranteed income for life, but after you (and your partner) are gone, that pot of money (from which the annuity provider is generating returns) is theirs. If you did it yourself, and you were able to create a passive income portfolio that gave you the income you need in retirement (alongside your state pension), the pot of money is still there after you are gone and is inherited by your family (according to your wishes). And if you have taught them well enough, then they can build their pot of money and add it to what you leave behind and enjoy an even better income in retirement and so on and so forth down the generations. Please correct me if I am wrong on this - but this is the main reason that I am not considering buying an annuity and doing it myself.
Useful information. Thanks 🙏
Welcome 😊@mikehardwicke23
Great explanation, if your suffering due to a lifestyle pension and bond crash, does it make sense to use the bond portion to buy an annuity as a way to offset the losses ? Thanks
Thanks once again Ramin.
My pleasure @MS-kh9fy
Well done! Thanks!
Thank you too! @blabbergasted4380
What's stopping someone saying they drink and smoke to get higher premiums? How does the insurance company check this?
Really great video ❤ I wonder if you have thought about doing some videos looking at how best to invest at different life stages. I am around 50 and (having left my job of 20 years somewhat unexpectedly) recently moved from accumulation to drawdown. I have tried to reorganise my funds into short, medium and long term pots: with short in a series of fixed rate savings accounts (or individual bonds) with staggered maturity dates, medium in a 60/40 fund, and long in two low cost global equity trackers. I have yet to work out the best strategy for rebalancing the pots. I have also assumed inflation of 3% per annum and a safe withdrawal rate of 3% and I have used the retirement living standards to help me budget. It would be great to hear your thoughts on making the switch from accumulation to drawdown for early retirees.
Hi - good questions - I am in a very similar situation
Well presented and concise.
Thanks @nationalnotes
Hi, thanks for the info. With a term policy do you get your entire investment back when it expires?
Is there any indicator of the direction Annuities will go ? Have they reached a peak now as; 1) central bank rate hikes plateaux and 2) Inflation falls back ? Stock markets are very volatile as we stumble from one crisis to another. Draw down is what I am doing now but there are high fees and poor performance of the SIPP. I need a set of questions to ask my financial advisor... I have a yearly meeting with him due now. Thanks.
Excellent explanation.
Glad it was helpful! @lplate1000
Excellent, worthwhile, objective and informative presentation.
Glad you enjoyed it! @EdfromCanada
@@Pensioncraft I have seen a couple more of videos you have been involved with. Wow, you are the most refreshing voice of logic and reason on You Tube, when it comes to investing. I truly respect your comments because you present the facts very objectively and then dissect and demystify the disinformation put forth by financial planners and advisors. Thank you again.
Very interesting video, thanks Ramin.
Glad you enjoyed it @shimsteriom4191
I greatly enjoy your videos but you maybe missed a few factors in this one: a) you didn't really cover the fact that purchasing an annuity removes longevity risk (whereas constructing you own bond fund doesn't). B) the implicit charge on an annuity is a single one-off charge. And there is transparency as it is very easy to compare annuity rates from different providers. C) Insurance companies tend to back annuities with higher yield illiquid assets rather than g ilts, which increases the return and reduces the cost of the annuity
I agree. The main benefit of an annuity is longevity risk protection i.e. the risk that you outlive your retirement savings due to a longer than expected life. If you buy an annuity that covers your basic needs, you get peace of mind that those needs will be covered for life.
Excellent!
Thank you! Cheers! @mikehardwicke23
Doesn’t draw down only work in a low inflation/interest rate environment? (I.e. where stock markets are TINA => bull market)
It looks to me like annuity rates are another reason why zero interest rate bound rates are a bad idea
The DIY annuity thing makes me think that could be automated/disrupted quite easily, surely there’s a market waiting to be captured?
As i understand it the charts that show an annuity rate is the actual money you get including any charges. Is that correct?
another problem with DIY is that it has no insurance against longevity, therefore does not maximise annuity payout.
Ishares have introduced fixed term bonds ETFs. Making it easier to build your own bond ladder. At the moment they only have maturity up to 2028
Surprised that you didn't mention the tax implications of these options.
Great video. Really like the idea of a bond ladder
Thanks! @rob_lightbody
Couldn't you just buy an individual thirty year bond at age 60 and just live off the interest payments? Plus your principle and cash flows wouldn't go to zero after you pass away. Fees would be very low too.
I’m curious to see answer on this
Video suggestion - hmrc v fractional shares in isa.
Two problems with the bond ladder:
It only works properly if there is a normal yield curve. That is where you get a higher interest rate for longer-dated bonds. That is not the case right now with our inverted yield curve.
Even in a normal yield curve situation, your bonds might not be able to keep up with high inflation, i.e. your Real Yield would not be very high. To keep up you might need laddered TIPS or stocks / stock funds.
Do a bond ladder for the next 3-5 years (just enough to survive any recession if one comes tomorrow), the rest in stocks
Brilliant video. The fees on annuities seem exorbitant so I'll be looking into a bonds ladder very shortly.
Thanks @mrmoggz5350
so.. if at the end of the fixed term annuity, the money left paid to you is the initial deposited amount LESS the interest PAID to you, that means you don't really gained anything, did you? Wouldn't it be the same to save it under the mattress and take as one needs? the only one that 'made any gains' on this scenario is the insurance company that got free money from you, to invest, and keep the returns.. am I missing something?
Something I've often wondered, can annuities only be purchased using a pension, or can I simply use a pile of cash from my ISA?
Hi Ramin. Simple question for anyone. I want to retire with a joint annuity at 55. My wife is 52. Can I still consider my age? Is an annuity still possible?
Economic investigator Frank G Melbourne Australia is still watching this very informative content cheers Frank as subscriber 😊
Much appreciated @detectiveofmoneypolitics
Annuities are expensive and confusing. I only consider the fixed annuity!🎉🎉🎉🎉🎉🎉
The importance of annuity (lifetime ones) is per cohort (group of people)). Such group has a distribution of death dates. The longer you live(survive) , the more you receive. I thought that was the extra edge of annuity.receive.
Cohort is a group of individuals in an age range. You will assigned to such a cohort
Id LOVE to own single GOVERNMENT bonds, but unfortunately in many smaller countries in Europe theres just no place to buy them. Internationally - like in IBKR - I can buy some sort of derivative or whatever that kinda gives me the ownership of a single bond.
Not much emphasis on the fact that because annuities are based on a pooled group with average life expectancies the rates offered can be higher than you can do yourself with a bond ladder, although the fees could possibly make this moot.
I agree if you have a condition that would increase your annuity then a bond ladder would not give you an enhanced payout unlike an annuity.
@@huggybear9922999 Do the insurance companies check to see if you are really a smoker and drink quite a lot for example. How could they prove that
Not sure why all the concern about fees. It costs more to keep my stocks and shares ISA just ticking over for the next 12 years than it cost to buy my fixed term annuity for the same time period
I'm just curious what happens if you invested all of your money in simple (not "Joint Life") annuity and died unexpectedly? Does the insurance company gets to keep it all?
Also, what if you live longer than previously expected - much longer - do they cut your Life annuity at some point? Like, dude, enough is enough...you're on your own now...
Was waiting to hear on these points as I thought they were important...
Agreed , these are important questions.
As far as I understand it ,
unless you took out the guaranteed period of say 10 years they get to keep everything if you die the next day.
The only advantage that is worth having is if you live much longer than expected, but much of the questions they ask will show how likely you are to live beyond the morn and they WILL adjust the payments accordingly.
I am interested to know how close they look at your lifestyle though, what's to stop you saying that you smoke 20 fags a day and drink 20 pinks a week to get the higher payments?
As I understand it no, once you've bought a standard annuity it keeps paying out until you die, and when you die the annuity dies with you. So if you bought a straight annuity paying out £20000 gross per annum, it should pay that until you die
Yes, they get to keep it all when you die, unless you've opted for an annuity with a guarantee period. This is what enables them to carry on paying out to other people even if they live for longer than expected. It's spreading the risk, like with house or car insurance. In fact, annuities are basically insurance against living too long.
Hi
How would you buy a bond ladder if all your money is with the insurance company??
I mean pension company 🤪
Move it to a SIPP.
Many thanks 👍👍
might people tell the insurance company they have poorer lifestyle choices in order to get higher annuity payments?
another great video. thanks for making annuities less opaque
I get the fees of insurance, but I would have loved to see an actual example of payment because those 5% fees are ultimately flat interest unlike growth, even if it's more percentual, the stock would take .1% of a compounded interest, I'm I right? Tell us the real truth not the numbers please
Once you've bought an annuity, say you got £6000 per every £100000 you payed, on a straight annuity will that continue to pay out £6000 for every £100000 until you die, it won't change will it?
I'm hearing a claim from another channel that Single Premium Immediate Annuities or SPIA's have no annual fees.
I dont think they are great but if you want an agreed date of some income and think you will make alot more from it (live a long time) then why not
I find it odd that by moving to a different provider you get more income than that being offered by your current provider , when a client from THAT other company is also being advised to move to a different provider to get more etc etc , and so on.
You need to shop around for the best deal, that's what he's saying. If your pension provider offers the best deal then obviously you would stick with them if you're buying an annuity. You could also change platforms if you're going to do a drawdown strategy, see which platform has lower fees or the best funds etc for you
@fredatlas4396 Yes , I get the point. Nothing against Ramin. The point I'm making is , no matter who you're with , be it car insurance , fuel supplier or pension , it seems ' your company ' is never the best.
Forget annuitirs biggest rip off going
Invest your pension pot in a stocks fund ,and draw off it eaxh year
IF the market goes down ,so what it Always goes.back up plus more
Interesting video as always . I have a 70% equities 30% bonds passive fund . I am now 62 and ready to retire , would you say that now is the time to buy an annuity .
Why not have a 90% stocks, 9% bonds, 1% money? Let it sell every month to get an income. If stocks go below a certain average the system leaves the stocks and only sells bonds or money. Once stocks are back above a certain average it re-balances.
It seems to me that could work and you could change it at will. So what am I missing?
Stocks and bonds are positively correlated when inflation is high and interest rates are rising, as in 2022, they both fall together.
@@george6977 How does that change the story?
Let's say I have $1000000
900 000 in stocks
90 000 in bonds
10 000 in money
I will start at age 65 and will live until 95. And I set my system to give me $3000 per month.
What does it matter what the market does at year 1, 2, 3, 4, etc?
You're missing the fact that over time you will become mentally and physically less capable. You're body isn't going to stay at 40 years old.
@@stevo728822 Who are you replying to? My system would take just as much work as an annuity. And the performance of your money doesn't care how fit you are.
This is exactly what I'm going to do
So why I die
My son gets the lot
Annuities are the biggest rip off ever
I can't understand why anyone would had over 300k say for a guaranteed income for life ,they they die 6 years later ,their wife dies 3 years later and kids get nowt
They insurance company keeps the lot
What’s going on this week?!?! - Chris Bourne is talking about bonds and pensioncraft is talking about annuities 😅
Okay so start drinking/smoking in retirement to get more money 😁
exactly, how closely do they follow your lifestyle I wonder, you could just tell them you live a bad lifestyle?
For the UK the fees aren't that great - seems this guy is talking primarily to Americans.
So basically , you give them your capital and they give you the interest on that money while they get interest on it. Then you die and you keep the capital !! why not just buy bonds ?
Annuities booooooo sacrilege 😅
Multi Year Guaranteed Annuties are like CD's but better.
I just can't get my head around Why anyone buys a annuity ,the is not one pro !!!!
I hate annuities. I think it's scandalous that these insurance companies charge such high fees and you lose all of your capital when you die (single annuity) or when you and your partner dies (joint annuity). Even worse, once you've bought your annuity you can't change your mind, for the rest of your life, yikes! Better to leave your money in a world & S&P 500 index tracker and forget about it.
How are you going to do that when you get dementia and can't even remember the password to your account?
What will you do if the markets crash, it can sometimes take over 10 yrs for stock markets to recover, of you are taking money once a year from your portfolio you could well run out of money unless you are lucky enough to have plenty of money in cash or similar safe investment to live off until the markets recover
@@fredatlas4396 I'm currently keeping 30% in Lyxor (CSH2) Smart cash (would like to increase to 40%) earning 5.18%. So if the market drops that's good news because I can get some bargains. Also have 2nd income stream from BTL properties.
@@stevo728822 Let my daughter sort it out for me 🙂
sorry . THEY keep the capital
annuities are rip offs!! Just buy T-bills and keep your principal and get interest!
I disagree- VA’s do have many fees yes, fixed annuities do not- they absolutely have their place in retirement planning