Weekend reading: Robert Shiller interview, questioning the efficient market

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• 1 dearieme March 1, 2014, 9:31 pm

  “Control over your time is the only worthwhile financial goal”: no crap about trying to ensure that your widow doesn’t have to eat cat food, then.
• 2 dearieme March 1, 2014, 9:45 pm

  “3% is the new 4% when it comes to the withdrawal rule”: OK, so why not just buy an index-linked annuity if you can find one paying more than 3%p.a. initially? Can a sixty-year old, say, get that at the moment with a 100% widow’s pension?
• 3 ermine March 2, 2014, 1:58 pm

  @dearieme there is a strong case for annuities for people who don’t have children (or otherwise wish to pass their capital wealth on) However, I’d personally rather at least have a mix of annuity and income from capital or even drawdown, because an annuity is exposed to the single counterparty risk of the financial institution underwriting it. Equitable Life spring to mind there.

  Makes me wonder if people are trying to warm us up to a Japan style secular stagnation
• 4 dearieme March 2, 2014, 2:09 pm

  “an annuity is exposed to the single counterparty risk of the financial institution underwriting it”: yeah, but nobody stops you buying four or five different annuities. In fact, anyone with a big sum available who buys a single annuity is being a bit of a dolt.
• 5 jon March 2, 2014, 2:12 pm

  @ermine, doesn’t the government protect annuity schemes. If for eg the insurance company goes bankrupt, I thought they would cover you to 90% of annuity income ? maybe I’m wrong ?
• 6 dearieme March 2, 2014, 3:57 pm

  @jon, even with protection I’d incline to diversify – particularly if I thought that a protection scheme might freeze my annuity i.e. suppress the inflation-linking. Why might I fear that? Well, it’s essentially what the Pension Protection Fund does.

  “If You Have Retired
  You will have been receiving a pension from your scheme before your former employer went bust.
  If you were beyond the scheme’s normal retirement age when your employer went bust, the Pension Protection Fund will generally pay 100 per cent level of compensation, which means we will generally pay you the same amount in compensation when your scheme enters the PPF.

  Your payments relating to pensionable service from 5 April 1997 will then rise in line with inflation each year, subject to a maximum of 2.5 per cent a year. Payments relating to service before that date will not increase.”
• 7 theFIREstarter March 3, 2014, 8:42 am

  Thanks again for the mention TI!

  I loved the “Everything is Awesome” post… very funny yet at the same time it may be terrifyingly accurate in what it is (suggestively) predicting
• 8 Mark Meldon March 3, 2014, 1:37 pm

  Remember with annuities that investor protection is vastly superior to, say, OEIC’s.

  Annuities are classed as long-term business, with the FSCS offering cover for 90% of the claim, without any upper limit (this was formerly 100% of the first £2,000 and 90% of the balance of the company’s liability to any policyholder) at the beginning of liquidation. There is no cash ceiling, but the 90% figure can be cut back if an independent actuary agrees that the original benefits were excessive.

  Annuity “books” are often bought and sold by life offices and many are administered by third party payroll businesses, but the ultimate liability will be with a life office.

  I believe I’m right in saying that no-one with an annuity has lost entitlements in modern times; indeed, I recall reading somewhere that the last time an annuity failed was when Henry VIII was king (as he abolished the monasteries and some offered “annua”), although I’ll gladly be corrected on that.

  Investment products and advice given by FCA-authorised persons (like me), where the provider/adviser is unable to meet a claim, are covered up to a maximum limit of £50,000.

  Annuities are often overlooked (as they are a one-off sale?), but I certainly think they have a role later in life.
• 9 Mark Meldon March 3, 2014, 1:54 pm

  Oh, and another quick thing! I’ve been an IFA for 25 years now and when I started out, it was common for individuals to purchase a pension plan of some sort and at the same time set up a whole of life assurance policy as a sort of annuity purchase price cost “return on death”. You used to be able to purchase guaranteed policies on this basis with a cash-in value (often poor, but something) but these have been legislated away. Whole life policies are available, but they are like “permanent” term life insurance policies, never acquiring a cash-in value.

  It’s true that there is a cost involved. Consider the following real-life example.

  I’ve just been dealing with an elderly, now rather infirm, gentleman who did just this back in 1971. He set up a “with-profits deferred annuity” with the then Royal Life and a unit linked whole life policy with the then Aetna. He paid £500 a year into the pension (£15,000 in total), before tax relief, and £350 a year into the life assurance policy which offered cover at the outset of £6,000 (there was tax relief on the life policy premiums, too). These were considerable commitments back in 1971.

  He took the pension of £25,600 (fixed) a year in 2001 upon attaining age 75; the notional pension plan value was £144,000, thus giving an annuity rate of 17.77% (I so wish I could purchase a policy offering such a guaranteed return today!) and kept up the life policy as £350 a year in premiums today isn’t very painful for him (he has plentiful other assets). He has now decided to cash-in the life assurance for £104,500 tax-free (and give the money to charity as part of his IHT planning).

  Life assurance and pensions get a rough ride in the media, but they can be very useful things, IMHO.