Equity market yields now match annuity rates


Originally published at: http://whichinvestmenttrust.com/equity-market-yields-now-match-annuity-rates/
The Coalition Government brought an end to the compulsory purchase of Annuities just as record low interest rates had chased down their returns. Now, and for a variety of reasons, equity yields have caught up with annuities, and a respected annual study is pointing to their continued long-term out-performance. Consider these two numbers. At a…


This could be a turning point in investments when investors (retiring ones) realise that Investment Trusts are the best option - don’t pinch me I will wake up! If dividends are to fall a little next year that should not affect pay outs from decent ITs, thanks to the revenue reserve and in some cases payment from capital (although not popular). But, the real key in the debate of annuity versus equity is dividend growth. It is not hard with ITs to have a portfolio with a dividend growth between 3-4%. With inflation lower for longer that looks like a good head start.
On the other hand, why are annuities paying out so little? We all know this is down to overpriced bonds and especially gilts. So, when that reverses annuities may start looking like a better deal but I am curious how the companies that offer annuities are going to stay around given the capital value will have hit the floor. I realise this is never returned to the investor or their family (unlike any equity investment, which is a very strong point for not having an annuity) and so it may not matter, since they will be awash with extra coupons. Maybe someone with insider know how of running annuities could shed some light on what will happen when bonds fall in price.


there is a 79% chance of equities outperforming gilts over 10 consecutive years and an 87% chance over 18 years

I think that this is confusing statistics with probability.

If I have a die and throw it, the probability getting a six is 1/6, i.e. 16.(6)%. If I throw the die ten times and get a one every time (and assuming that the die is not loaded… :slight_smile: ) the probability - or chance - of throwing a six the next time is still 1/6.

If my equities outperform my gilts over the ten years that I have held them, then they have done so for 100% of the time. Using that figure with probability - or chance - would imply certainy to the outcome, i.e. that equities would outperform regardless. But if gilts outperformed on the eleventh time then that 100% figure for equity outperformance would reduce to 90.(90)%.

Therein lies the difference: the chance of a specific outcome when throwing a die is unaffected by previous results, i.e. the chance of acheiving a desired result the next time remains the same. But with the equity/gilt example the figures do get altered by the latest outcome - because unlike the die, these data are a record of what has happend in the past, and as we all should know, what has happened in the past is not a reliable guide to what will happen in the future.


I’d rather go with a probability of 79% than 21% though @arkwelder.

I know past performance is no guarantee but it is an indication, one of many certainly.


But that is the issue: they are not probabilities, they are historic performance data - and those data will change according to future performance.

Other problems occur with the use of averages and other numbers that are calculated from large data sets is that both long and short term trends can be masked, and recent can take a while for these data to affect the long-term averages. e.g. gilts might outperform equities over the next ten years, but the effect on the 79/21 figures might not alter that much in the near term. More useful (or just interesting) would be the trends to those 79/21 numbers, i.e. how they have been changing over time.

There are external factors that will the returns from gilts and equities, and to get similar outcomes to the 79/21 historic results in the future we are likely to need similar factors going forward. Will this happen? Possibly, but I do keep thinking that we have had just over 30 years where interest rates and inflation have been on downward trends and I can’t see this being repeated over the next 30 years - and if inflation does continue downwards over the next 30 years then gilts are very likely to be the best place to be.

But if you’re asking - I do have a higher allocation to equities than to bonds…