PHEdinburgh
New Member
Hi All- hope everyone's well!
I just came across an idea that I thought was interesting, and wanted to see what others thought about it...
The challenge I'm interested in is how we can use a pot of money / savings to fund retirement.
We basically have 3 options at retirement as far as I see - 1. keep the savings invested and take cash out as and when you need it, 2. move it all into your bank account, or 3. buy an annuity (or a mixture of these options).
For options 1 and 2, you run the risk of running out of money, because you don't know if you're going to live until 70 or 100. Option 3 is often seen as expensive.
One of the reasons 3 is expensive is because an insurance company has to guarantee your income regardless of interest rates and general life expectancy (i.e. even if there's a big change, like a cure for cancer). Therefore- they err on the side of caution (from their perspective) and assume people are going to live long lives when setting annuity prices. If people live an 'average' amount of time, this means the insurance firm makes a profit.
I've heard something else mooted as an option between 1 and 3. Basically, people join a pool with people in similar circumstances to themselves, and each has a pot of savings that they draw from year by year (like option 1). However, when anyone in the pool dies, their savings get shared out across every £ in the pool (similar to how insurance companies manage annuities under the bonnet).
Therefore, this feels a bit like an 'interest rate'. In summary, this would likely offer a higher level of income than an annuity because you cut out the insurers profit, but nothing is guaranteed (i.e. if there's a cure for cancer and everyone loves longer, you'd get less than expected).
Would people go for this type of thing if it was an option?
I just came across an idea that I thought was interesting, and wanted to see what others thought about it...
The challenge I'm interested in is how we can use a pot of money / savings to fund retirement.
We basically have 3 options at retirement as far as I see - 1. keep the savings invested and take cash out as and when you need it, 2. move it all into your bank account, or 3. buy an annuity (or a mixture of these options).
For options 1 and 2, you run the risk of running out of money, because you don't know if you're going to live until 70 or 100. Option 3 is often seen as expensive.
One of the reasons 3 is expensive is because an insurance company has to guarantee your income regardless of interest rates and general life expectancy (i.e. even if there's a big change, like a cure for cancer). Therefore- they err on the side of caution (from their perspective) and assume people are going to live long lives when setting annuity prices. If people live an 'average' amount of time, this means the insurance firm makes a profit.
I've heard something else mooted as an option between 1 and 3. Basically, people join a pool with people in similar circumstances to themselves, and each has a pot of savings that they draw from year by year (like option 1). However, when anyone in the pool dies, their savings get shared out across every £ in the pool (similar to how insurance companies manage annuities under the bonnet).
Therefore, this feels a bit like an 'interest rate'. In summary, this would likely offer a higher level of income than an annuity because you cut out the insurers profit, but nothing is guaranteed (i.e. if there's a cure for cancer and everyone loves longer, you'd get less than expected).
Would people go for this type of thing if it was an option?