As the OP, I’m certainly getting my money’s worth! No pun intended.This is shaping up to be one of the better threads on AAM helped by @Duke of Marmalade’s relevant financial background
Critical point... A statement I'll quote in the future when advising /chatting about pensions.if you are comfortable enough that you foresee no circumstances where your assets will not see you through this mortal coil then there is no reason for securing a lifetime income with an annuity.
Welcome to AAM. By "tendentious" I mean with an unjustified bias, which I will elaborate on in further answers to your points below. I do not mean it in any personal pejorative sense. BTW liked your video clip
They certainly were during the QE period. There are dysfunctional aspects to the annuity market. I remember a long time ago life insurance companies backed their annuity books at least partially with equities. These days, Solvency II has been a big drag on annuity pricing forcing companies into gilts and to provide for 1/200 risks like longevity improvements. That's why I am suggesting state backed inflation linked annuities for the AE initiative.
@AAAContributor has corrected you on this point. It really is rather basic.
Sorry, I don't see the relevance. There are no free lunches in this world either with annuities or ARFs.
Another rather basic error. Annuity income is only subject to tax when it is received by the annuitant - just like with an ARF. Within the life company the investment return is tax free.
I hate to say it but you are compounding (see what I did there) the previous error. The investment income backing an annuity within the life company is totally tax free and will compound (if it is not distributed). This is exactly the same as with an ARF. With a level annuity the distribution (annuity payment) will always be higher than the investment income and so compounding does not arise. With an inflation linked annuity the opposite situation will hold initially and compounding will occur. With an ARF if the investment income exceeds the deemed distribution, yes there will be compounding. This might be achieved by investing in high dividend stocks. There is no difference in tax treatment between the two.
Sorry, but I hope I have convinced you that this is no different than with an annuity. Let me illustrate.
(a) Punter has €100k in an ARF and earns €4k interest. She receives €4k subject to tax.
(b) Punter uses the €100k to buy an annuity. The life company earns €4k and pays it out as an annuity. She pays tax on the €4k.
Trust me, if it was as you describe the life companies would be up in arms and the Central Bank would withdraw the licence from anyone who was recommending an annuity.
Your basic error explains why you have taken such a tendentious approach in favour of ARFs - it would certainly be justified if your assumptions were correct.
As a financial novice who is always keen to educate myself in these matters, I was interested in the last point discussed above by DOM, concerning annuity fees. One of the learning points for me from this thread is that the process of setting up the annuity results in a fee (or commission) for someone, be it an IFA or other. That’s only fair I’m sure, the worker is entitled to his wage, but here is my potential learning....perhaps this fee is negotiable from a customer’s perspective....? In other words maybe the IFA (or other) can offer an enhanced annuity rate in return for a lower fee?
Yes, and I know it's Ireland but maybe any remake of the video would go easy on the "life companies profiteering by their annuitants' deaths" motif.1. Yes, I'm aware of how mortality cross subsidy operates. Perhaps I should have called this out in the video so that viewers could understand the inner workings of annuities.
It's in the pricing and there lies another advantage of annuities; after the initial transaction ordinary folk can forget about the markets. Maybe the remake (in the interests of balance) could describe (for ordinary folk) the excessive costs and the anxieties of having your old age so dependent on the vagaries of the stockmarkets.2. Regarding the tax treatment, yes there is no difference. I wasn't suggesting there was. I was getting at the point that within the ARF, the funds are growing tax free which can enable higher drawdowns in the future. "The investment income backing an annuity within the life company is totally tax free and will compound" - would you mind explaining how this benefits the annuitant?
This is in my view the most important issue around an ARF and for a DIY investor with an ARF it’s a potential train wreck waiting to happen.There’s another angle that just occurred to me ....as we age our cognitive abilities diminish sometimes into dementia or similar. The process can be slow but relentless ...at what stage are we still sufficiently competent at understanding and acting upon investment advice associated with having an ARF?
Good question. I am one of those DIY investors who @Marc thinks isThere’s another angle that just occurred to me ....as we age our cognitive abilities diminish sometimes into dementia or similar. The process can be slow but relentless ...at what stage are we still sufficiently competent at understanding and acting upon investment advice associated with having an ARF?
Thankfully, I'm not yet (I hope) at the stage of my cognitive abilities declining towards dementia, as @Kev1964 fears, but it could and probably will happen at some stage. As I noted in an earlier post (#12 above) my investment strategy, though nominally "active", has become quite passive in the last few years, partly because of my advancing age, more because I'm putting a lot of effort into promoting a smoothed equity approach to auto-enrolment, which I'm sure most contributors on this site are well aware of.a potential train wreck waiting to happen.
Colm sounds like you might fit the first person described in my post #42.I'm confident that dividends on existing holdings (plus the small amount of cash in the account) will be more than sufficient for "income" needs. Neither am I concerned that I'll have to sell much over the next couple of years, because dividends on existing holdings will cover a high proportion of my income needs.
But this whole thread has convinced me of the serious inadequacies of either option for the sort of people that AE is targeted at. Society has not yet twigged to the fact that DC pensions are just horribly inappropriate for the woman on the 46a. If AE was being launched 20 years ago I am sure it would be a supplementary DB state pension.One thing is for sure is that if you are comfortable enough that you foresee no circumstances where your assets will not see you through this mortal coil then there is no reason for securing a lifetime income with an annuity. If on the other hand you see circumstances where your assets might run out or you might need to curb your lifestyle then there is an argument for taking out some longevity protection by purchasing an annuity.
But if you put the cash on deposit it will still be there at the end of your life.Good point Marc. Unlikely to get 4.5% interest if left on deposit somewhere.
Having almost certainly lost real value due to deposit rates lagging behind inflation.But if you put the cash on deposit it will still be there at the end of your life.
Thanks for sharing, very interesting, they have been creeping up for a while now.Zurich.ie has a site which allows you to calculate annuity rates and I've been regularly doing personal quotes. Rates are on upward trend as we know and to illustrate that here are some figures (age 61, no escalation, single). Usually Zurich rates are better than IL.
4th May 2023: 4.79209%
21st Aug 2023: 5.01280%
Here it is - very useful comparison tool comparing an annuity with drawing down an ARF.Thanks for sharing, very interesting, they have been creeping up for a while now.
Do you have a link to the zurich annuity calculator, i could only find the Irish Life one
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