# Pension Commute - Bad time to buy an annuity ?



## G J D Swain (Oct 20, 2009)

Hi :

I see by the Cannex charts (click 'Annuities' at top of the right column) that I can't get much of an annuity for my money at the moment . From what I've read here and elsewhere this is partly because of the current low bond yields/interest rates .

My question is , how much would an increase in interest rates affect my annuity buying power ? Would it be increased noticeably in a month or 2 , or would it take many months before an increase in buying power is even noticed in these charts ?

From my meager understanding so far , I gather that , because of low interest rates it is a good time to get the most bang for your buck when commuting a pension , but a terrible time to buy an annuity with that money .

A chart showing 'annuity costs vs time' (2005/06/07/08/09) might help illustrate the answer to that question , but I've had no luck in finding such a chart .

Thanks in advance
G J D Swain


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## MoneyGal (Apr 24, 2009)

Depending on your age, interest rates can play a very small role in determining annuity payouts. 

After about age 70, interest rates play a remarkably small role in determining annuity payouts. (Instead, the payouts are largely based on mortality credits.)

In addition, annuity rates generally lag interest rate changes (but I'd be hard-pressed to find you an academic citation on that). 

Milevsky et al. have published a Sustainable Portfolio Withdrawal Index which provides some background information on annuity prices. The index provides (among other things) month by month annuity payout rates for a 65-year-old male from Jan 2008 to the present.


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## OptsyEagle (Nov 29, 2009)

_"because of low interest rates it is a good time to get the most bang for your buck when commuting a pension , but a terrible time to buy an annuity with that money "._

Those are both the same thing. This only happens with defined benefit plans. In this type of plan they know how much money you are entitled to on a monthly basis for your lifetime and basically use the same information as an annuity to determine your commuted value.

If you wait until rates are higher, as you will have obsered your commuted value will be less. Another way of looking at it is that interest rates are irrelevant. You will get what monthly benefit you are entitled to, no matter what.

I assume what you are trying to do is beat the system. Benefit by lower rates when you convert your monthly income to a commuted pension and then try to benefit from higher rates when you convert that lump sum back into a monthly income. Good luck with this.


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## leslie (May 25, 2009)

Agree with Eagle. Any change in rates will move both factors in your scenario, without any net benefit.

Annuity brokers have been excusing low payouts on low interest rates since 1999 that I am personally aware of. But this is not really true. Here is a link showing historical debt rates vs payout rates. Look back and you will see little difference over time.


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## G J D Swain (Oct 20, 2009)

MoneyGal said:


> Depending on your age, interest rates can play a very small role in determining annuity payouts.
> 
> After about age 70, interest rates play a remarkably small role in determining annuity payouts. (Instead, the payouts are largely based on mortality credits.)


 .

*"can play"* Well , my age is 55 , so I'm guessing it 'will play' a larger role ? The question is "how much?" .



MoneyGal said:


> Milevsky et al. have published a Sustainable Portfolio Withdrawal Index which provides some background information on annuity prices. The index provides (among other things) month by month annuity payout rates for a 65-year-old male from Jan 2008 to the present.


Thanks for the link , and the chart looks interesting since it is far from linear , but I do not understand what the chart is even representing , or how to read it .


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## G J D Swain (Oct 20, 2009)

OptsyEagle said:


> _"because of low interest rates it is a good time to get the most bang for your buck when commuting a pension , but a terrible time to buy an annuity with that money "._
> 
> Those are both the same thing. This only happens with defined benefit plans. In this type of plan they know how much money you are entitled to on a monthly basis for your lifetime and basically use the same information as an annuity to determine your commuted value.
> 
> ...


(brutal ...)


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## G J D Swain (Oct 20, 2009)

leslie said:


> Agree with Eagle. Any change in rates will move both factors in your scenario, without any net benefit.


(Thanks for your reply) Right , but I'm aware of the direct relationship mentioned . Funny , but I attempt to preface any question with enough info to try and prevent people from wasting their time pointing out the obvious stuff . However , at the same time I try and keep the preamble to a reasonable amount also . Perhaps my preamble was a little confusing or even misleading ?



leslie said:


> Annuity brokers have been excusing low payouts on low interest rates since 1999 that I am personally aware of. But this is not really true. Here is a link showing historical debt rates vs payout rates. Look back and you will see little difference over time.


Thank you ! Excellent link and exactly what I was looking for . (If only it showed the data for age 55 ...) Very interesting results here . Enough to make you want to chart it in Excel . Obviously there are other factors involved in the payout rate determination besides Bond Rates .

Thanks again for your help .


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## Berubeland (Sep 6, 2009)

I just want o point out that interest rates are unlikely to go lower. If you commute it and buy an annuity later rates only have one direction to go and that's up.


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## MoneyGal (Apr 24, 2009)

I have that data set. For a single male, age 55, retiring in 10 years but purchasing an annuity now, in a scenario of long-term interest rates at 2%, I get $10,156 in annual payouts for every $100,000 annuitized. This is under a no-arbitrage (fair pricing) model. Actual annuity rates will differ.


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## MoneyGal (Apr 24, 2009)

I have a specific reference (beyond the IFID Implied Longevity Yield data that Leslie linked to) on the value of mortality credits for annuitants of different ages. 

If you take a look at this paper, prepared for the CFA institute, there is a good basic explanation of annuity pricing which includes a table (on page 42) of the spread of the value of mortality credits over the interest rate for annuitants between the ages of 55 and 100. 

The table points out that it's only at age 65 and older (using unisex mortality credits) that the value of mortality credits exceeds 100 bps. Hence, the recommendation, oft-repeated, that the optimal time to annuitize is age 70 and older.


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## G J D Swain (Oct 20, 2009)

MoneyGal said:


> I have that data set. For a single male, age 55, retiring in 10 years but purchasing an annuity now, in a scenario of long-term interest rates at 2%, I get $10,156 in annual payouts for every $100,000 annuitized. This is under a no-arbitrage (fair pricing) model. Actual annuity rates will differ.


Thanks , that's a very interesting figure . I'm 54.4 years old and I would expect my current CV might fall somewhere , loosely , within this data set .

Anyway , off-topic , but ... there are other 'milestone ages' allowed for in my pension that I will not see if I commute now . For instance , at 55 there is a "retire early with a 30% reduction plus a $2400/year bridge benefit" milestone . At 58 there is a "retire early with no reduction and a $3400 bridge benefit" milestone , and no reduction/$4800 bridge at age 60 .

It seems that because I am commuting before 55 or 58 or 60 that the CV is then based on a very simple calc using just the monthly pension dollar amount that I would receive at age 65 .

Thanks again ,
Yours Truly ,
Sherlock Holmes


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## G J D Swain (Oct 20, 2009)

MoneyGal said:


> I have a specific reference (beyond the IFID Implied Longevity Yield data that Leslie linked to) on the value of mortality credits for annuitants of different ages.
> 
> If you take a look at this paper, prepared for the CFA institute, there is a good basic explanation of annuity pricing which includes a table (on page 42) of the spread of the value of mortality credits over the interest rate for annuitants between the ages of 55 and 100.
> 
> The table points out that it's only at age 65 and older (using unisex mortality credits) that the value of mortality credits exceeds 100 bps. Hence, the recommendation, oft-repeated, that the optimal time to annuitize is age 70 and older.


Thanks , but the link is to an article on "Private Wealth" . I don't see the paper or the table .

Bye For Now


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## MoneyGal (Apr 24, 2009)

The paper is linked on that page. Here's a direct link to the paper.


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