ARF & annuity rates

Diarmuid

I'm trying to do some spreadsheet work on my pension, and I'm struggling a bit with getting some ROM figures for Annuities and ARF.

For an annuity my understanding is that in return for my pension pot, I get a regular payment which will be based on a few conditions and my health / age.
So straightforward in Excel (PMT). However getting ball park figures for that rate is not easy. Any hints?

For an ARF, it looks more like reinvesting my pot in a fund. In which case I am working it out by using a FV on the principle but deducting my "salary" every year. Is this a reasonable approach? Again I'm struggling to find rates. Presumably they are linked to the underlying asset but even how much divergence from such funds? What's the expense % etc..

Has anyone done this in Excel or google spreadsheet that they are willing to share

All this is at a planning stage, I'm mid 40s so I've time to go, I'm just trying to work out how I stand right now

Henry Ford III

I don't understand exactly what you are trying to do but would comment as follows:-

Annuity rates vary from provider to provider (open market option), but they are all based on underlying interest rates, which are ultra low currently. My understanding of the calculation for these is that for example a male aged 65 will have a life expectancy of c.15 years. Insurer buys a long dated govt stock to suit. The annuity rate calculation takes 1/15 of the purchase price plus whatever interest return applies, less costs. So if you live beyond 80 you'll have done better than average in life expectancy and annuity payment term. The opposite applies also.

There's no medical considerations for an ordinary annuity.

Once purchased an annuity is payable for life, and is as secure as you'll get.

Impaired Annuities became available in recent years which reflect someone's relatively poor health, and reduced expected annuity payment term. They are essentially an odd form of reverse life assurance. The worse your health the better you get paid.

Things get complicated and increasingly expensive when you look at guaranteed periods (where the annuity is paid whether the annuitant is alive or otherwise), indexation in payment, spouses annuities, overlaps etc.

ARF's are post retirement investment accounts designed to generate income. They carry investment risk. A kicker is imputed distributions - you'll need to earn up to 6% (depending on your age/size of ARF) to maintain the value of your fund. You can draw down whatever you wish subject to tax.

The key benefit here is ARF assets can be passed on to spouse or others upon death.

I've ignored the special rules for AMRF's here as I just wanted to highlight the biggest differences between annuities and ARFs.

No two people are the same and our circumstances vary so I'd encourage anyone to get proper independent advice on this area. A wrong choice could be very painful financially.

Diarmuid

Henry Ford III wrote: »

ARF's are post retirement investment accounts designed to generate income. They carry investment risk. A kicker is imputed distributions - you'll need to earn up to 6% (depending on your age/size of ARF) to maintain the value of your fund. You can draw down whatever you wish subject to tax.

Thanks for the helpful response.

With regard to your statement, why would I want to maintain the value of my fund? Isn't' the intention to run it down to zero on the day I die?

Diarmuid

Diarmuid wrote: »

Thanks for the helpful response.

With regard to your statement, why would I want to maintain the value of my fund? Isn't' the intention to run it down to zero on the day I die?

Yes, but you don't know if you're going to die at 70 or 100. In addition, you may want to leave some behind for dependants

Henry Ford III

Diarmuid wrote: »

Thanks for the helpful response.

With regard to your statement, why would I want to maintain the value of my fund? Isn't' the intention to run it down to zero on the day I die?

Maybe and maybe not depending on your circumstances.

If you were single and without children you'd be much more inclined to run it down.

If you had a spouse and kids however your thinking might be different.

The J Stands for Jay

Sample annuity rates are attached. For the ARF projections, you could just use the same assumptions you're using for the growth in your pension funds; they're essentially the same funds, but you'll need to allow for the compulsory withdrawals on the ARF (5%?).

Diarmuid

McGaggs wrote: »

Sample annuity rates are attached. For the ARF projections, you could just use the same assumptions you're using for the growth in your pension funds; they're essentially the same funds, but you'll need to allow for the compulsory withdrawals on the ARF (5%?).

Thanks. That's great info.
Those numbers seem quite high. If one had a pot of €1m, took 200k lump sum, that would leave 800k to buy an annuity. Would an annuity really pay out 3%?

coylemj

Diarmuid wrote: »

Thanks. That's great info.
Those numbers seem quite high. If one had a pot of €1m, took 200k lump sum, that would leave 800k to buy an annuity. Would an annuity really pay out 3%?

It may seem generous compared to interest rates on deposit accounts but with an annuity, there is an element of captal distribution in the quoted rate because there is no asset remaining when the annuitant dies.

Worst case scenario: you take that 3% annuity and die before 5 years elapses. Your draw is 15% and the insurance company keep the rest.

ANXIOUS

coylemj wrote: »

It may seem generous compared to interest rates on deposit accounts but with an annuity, there is an element of captal distribution in the quoted rate because there is no asset remaining when the annuitant dies.

Worst case scenario: you take that 3% annuity and die before 5 years elapses. Your draw is 15% and the insurance company keep the rest.

Obviously with a number of caveats.

The J Stands for Jay

Diarmuid wrote: »

Thanks. That's great info.
Those numbers seem quite high. If one had a pot of €1m, took 200k lump sum, that would leave 800k to buy an annuity. Would an annuity really pay out 3%?

It's been a long time since I heard someone think an annuity rate was high...

Henry Ford III

coylemj wrote: »

It may seem generous compared to interest rates on deposit accounts but with an annuity, there is an element of captal distribution in the quoted rate because there is no asset remaining when the annuitant dies.

Worst case scenario: you take that 3% annuity and die before 5 years elapses. Your draw is 15% and the insurance company keep the rest.

That's a common misconception.

The nature of an annuity is to pool annuitants life expectancies. Some die early and others don't. The rates will be competitive and there's no windfall for the life assurance co. if an annuitant dies early.

If you throw in modern impaired life annuities (where people who have a reduced life expectancy get paid more) and the "normal" guaranteed period of 5 years (where the annuity is payable whether the annuitant is alive or not) and that myth is further exposed.

Annuities are value for money but the rates are low due to ultra low interest rates.

The J Stands for Jay

Henry Ford III wrote: »

That's a common misconception.

The nature of an annuity is to pool annuitants life expectancies. Some die early and others don't. The rates will be competitive and there's no windfall for the life assurance co. if an annuitant dies early.

If you throw in modern impaired life annuities (where people who have a reduced life expectancy get paid more) and the "normal" guaranteed period of 5 years (where the annuity is payable whether the annuitant is alive or not) and that myth is further exposed.

Annuities are value for money but the rates are low due to ultra low interest rates.

The insurance company only gets a windfall when people die earlier than they initially assumed they would.

I suspect that annuity rates will get worse in future, as the only people who will go for them will be in near perfect health and will have long life expectancies. Anyone else will go for an impaired life annuity or an ARF

coylemj

Henry Ford III wrote: »

That's a common misconception.

When I said the insurance company keeps the money, I meant that it goes into the pool to pay the annuities to people who live longer. My point was that an annuity is a gamble and if you die within a few years, you lose.

Diarmuid

McGaggs wrote: »

It's been a long time since I heard someone think an annuity rate was high...

Well just on the basis that interest rates are 0%, bonds are rock bottom so getting any return is a challenge

The J Stands for Jay

Diarmuid wrote: »

Well just on the basis that interest rates are 0%, bonds are rock bottom so getting any return is a challenge

That's making a lot of people look at ARFs who would rather have the certainty of an annuity.

I wonder what the split between annuity and ARF sales is these days. I reckon it's mostly ARFs (based on no data at all).

Henry Ford III

coylemj wrote: »

When I said the insurance company keeps the money, I meant that it goes into the pool to pay the annuities to people who live longer. My point was that an annuity is a gamble and if you die within a few years, you lose.

It's not a gamble at all. An annuity is buying absolute certainty. A certain payment for life.

That's really all that matters. It'll do exactly what it is supposed to do.

No former annuitants moan about winning or losing

abff

The advantage of an annuity is that that it eliminates both investment and longevity risk. But you would still be subject to inflation risk unless you buy an index linked annuity. However, current annuity rates offer very poor value for money for the following reasons.

1. Annuities are priced by reference to German bond yields, which are currently negative.

2. Because EU legislation obliges life offices to offer gender neutral rates, they are based on female life expectancy, which for a 65 year old is in excess of 20 years.

3. Because there is a presumption that the person taking out an annuity is in reasonable good health, the life expectancy allowed for in annuity pricing is higher than the above average. However, enhanced rates can be obtained if you are in poor health or in a higher risk category.

4. They include a loading for expenses, profit and risk. This is necessary to protect the solvency of the life office.

Anyone retiring now is extremely unlikely to purchase an annuity because of the perceived poor value for money currently available. The standard annuity rate for a 65 year old is 3.796% (per Irish Life's website) and would be subject to a €5 a month contract charge, bringing the net rate down to 3.736% for someone with €100,000 to invest.

This is for a non increasing annuity with a five year guarantee. Eliminating the guarantee makes practically no difference. The revised rate would be 3.808%. Someone buying an annuity at today's rates would therefore have to wait almost 27 years before they get their money back.

So putting the money in an ARF looks like a bit of a 'no brainer' at present. An attraction of using an ARF for many people is that the residual value goes to their dependants on their death whereas an annuity dies with them. But the big drawback is that you are taking on both investment and longevity risk.

In general, the more risk you are prepared to take, the higher the return you will achieve in the long run. But more risk means more volatility and current circumstances have led to extreme volatility in investment markets. And most people would need some form of ongoing advice in relation to their ARF, which would eat into the net investment return they will achieve.

For someone in their 40s, it is impossible to say with any degree of confidence what the bond and equity markets will be like when they reach retirement age. But the same general issues will apply, though the value for money equation may be quite different.

coylemj

Henry Ford III wrote: »

No former annuitants moan about winning or losing

Agreed, none of the losers complain - because they're (prematurely) dead. But if an annuitant passes away within a few years, the descendants would rightly be p1ssed off that the money wasn't put into an ARF.

Diarmuid

Thanks. That's great info. I'm really just putting in rough order of magnitude numbers into my spreadsheet to see how much I need in my pot to retire and trying various scenarios like taking a break now etc...

coylemj

McGaggs wrote: »

That's making a lot of people look at ARFs who would rather have the certainty of an annuity.

I wonder what the split between annuity and ARF sales is these days. I reckon it's mostly ARFs (based on no data at all).

A neighbour of mine worked in a branch of one of the major Irish banks. A few years ago, he accepted an offer of early retirement - he was well over 50 so was able to leave with an immediate pension.

During the last week of his service, he was asked to go to meet someone from HR in head office so off he went. During the meeting, a piece of paper was put in front of him which he signed. It was a document to purchase an annuity using his AVC fund. The annuity was to be purchased from the insurance subsidiary of the bank. He was not advised to shop around for a better rate from the likes of Zurich or Irish Life, he was not told that he had the option to put the fund into an ARF or even that he should seek independent advice - he wasn't given any advice at all. At the time, interest rates were as low as they are these days so the annuity he signed up for will be peanuts.

His circumstances were that the children had left the nest, he owned a very nice house which he had lived in for 30 years so there was likely no outstanding mortgage. He had a bank pension and his wife has a permanent job in the public sector so she will also have a pension. With two rock solid pensions coming into the house, an annuity was not an appropriate investment for him by any stretch of the imagination.

So if you're wondering who buys annuities these days, there's an example.

abff

Just to follow up my earlier post, here's a link to Irish Life's annuity quotation website if anyone wants to look up annuity rates at different ages. You can also get quotes for joint life annuities, with different guaranteed periods and with either fixed rate or index linked increases.

https://www.pensionplanetinteractive.ie/ppi/public/loadPensionChoice.action

In case you're wondering why I've only linked to the Irish Life website, to the best of my knowledge none of the other annuity providers in Ireland have an online quotation system that's available to the general public. And Irish Life's rates tend to be there or thereabouts in terms of what's generally available in the marketplace.