Cooper and Cumbo – Aussie dream team
In a real example, an Aussie who bought a $10,000 deferred annuity at 65 would receive an annual income of $1741 a year from age 85, if they survived to that age.
So the retiree has a 20-year window to spend down their capital knowing they will have a secure income from 85.
— Josephine Cumbo (@JosephineCumbo) October 1, 2019
It takes skill to write so much in so few words – congratulations Jo Cumbo -thanks to Jeremy Cooper for the numbers. There is nothing to beat some Aussie straight talking and with the ashes lost to us for another years it’s good to see you putting something back!
Three reasons why deferred annuities matter in the UK
The tweet tells us what a deferred annuity looks like but why might it matter? Here are some simple suggestions.
- Peace of mind
Most of us have DC pots but few of us know how long they’ll last us if we go down the drawdown or UFPLS routes. A deferred annuity is a “backstop” – a word we all understand through politics.
In the best scenario where we are living longer than we expected, the worst scenario, our money running out before we do , is avoided, the deferred annuity is a pure insurance against us living too long and knowing the cost of that insurance when we are in a position to pay the premium is very helpful. For many – purchasing deferred annuities could provide peace of mind,
2. Understanding difficult choices
The second reason why deferred annuities are helpful is that they help us understand the choice architecture we’re presented with at retirement. The binary choice of annuity v drawdown will not be supplemented by a third choice – say CDC – within the “time to choose” of the current cohort approaching decision time. Even
For most of us, the opportunity of having this risk covered involves buying an immediate annuity today, sadly the deferred annuity market in the UK isn’t well formed, there are only one or two insurers offering rates , but demand may grow. Even if a deferred annuity isn’t purchased, a rate for it is helpful for those trying to make decisions about the future.
Whether those decisions are taken with an adviser or not, deferred annuities can help us make the right decisions.
3. Building certainty into drawdown choices
I am not the first to point out that deferred annuities could be packaged into drawdown products to provide an alternative to pooling mortality risk.
Though I prefer the pooling of CDC, I understand the arguments put forward by organisations such as Alliance Bernstein and Salvus for a hybrid DC plan which depended on an insurance company guarantee paid for out of tax free cash or a reduced drawdown.
A pragmatic solution of a Faustian pact with insurers?
It is interesting that what Jeremy Cooper chose to talk with Jo Cumbo about was the difficult issue of longevity. The Australian Super system’s weakness is that it confuses wealth with retirement security. A wealthy Australian in his sixties can die in a ditch in their nineties and their Government knows it. Ultimately the only insurance older Australians can rely on is social security and this implies an intergenerational transfer from young to old that is precisely what critics of collective DC plans find so unacceptable.
The deferred annuity system is not so accurate as pooling within a CDC scheme , it has weaknesses – insurers need to reserve and provide a margin for their shareholder. The opportunity cost of investment lost would be considerable and – as mentioned- there would need to be a lot more insurers prepared to offer rates before a deferred annuity system got traction.
But if we are ever to progress financial security for those worried by annuities and drawdown, if we are to take informed choices on how to use conventional products and if we are find new hybrid products which can be brought to market without new legislation, then deferred annuities may be the best answer.
New choices for the Pension Plowman
This is one of the first blogs I have written since leaving First Actuarial on October 1st. I have not written about alternatives to CDC before now, out of a sense of solidarity with my previous employer and CDC remains my preferred solution for those who cannot choose or do not want to choose how they provide themselves with a wage for life.
However, I do now feel I have greater scope to look at other alternatives and intend to do so. If any of my Australian readers can provide me with more information on how the Australian market for deferred annuities is developing – I would be very interested to read it!