DIY drawdown

I would be tempted to lower costs by drawing down once a year, and then spending the money at the rate of £500/month. It could be kept earning interest in the meantime in an interest-bearing current account e.g. at Santander.

I'm a great fan of HL, but they are a bit pricey for £200k.

kingston_dan wrote: »

He currently has a pension pot of about £265000 and is planning on taking 25% lump sum. He will be left with a pot of about £200000. He understands the annuity options but likes the idea of keeping control of the capital and having it in drawdown. ... His aim is to receive about £500/month drawdown income without eroding the capital.

Easy part first. That's an income target of 3% of the capital value. That's roughly the same as the dividend yield of the FTSE All Share Index, which long term pays in total about 5% plus inflation. So he can reasonably anticipate in average conditions to increase the £500 with inflation and see the capital value growing by 2% a year or so, after deducting something for costs.

Average conditions is important. markets don't give average performance, they have ups and downs. this is OK but he should be prepared to decrease the income target, or not increase it, if markets start a major downturn just after he retires. however, since he's only planning to take about average FTSE income he's already well protected against this risk, since he won't need to draw on capital.

If he wanted to take more than the natural income he should do something like keeping a year to three years of anticipated income in a savings account or other fixed interest paying places that are accessible, so he could maintain the income without having to sell the capital during a downturn. He'd also need to be willing to drop income target if the downturn started soon after retiring and was sustained long term. even taking just the natural income some of this is desirable to protect against a sustained drop in dividends.

kingston_dan wrote: »

It would want to be pretty low risk and quite stable.

the income from the FTSE would be quite stable but it would be a good idea to diversify with a substantial portion in global equity funds. This is because markets often move out of sync with each other, so it'll reduce volatility, the routine ups and downs.

Beyond that are other types of investment than equities. For equities in big markets he should expect a drop of 20% a few times a decade and a drop of 40% once or twice a decade. With recoveries in between that generate long term that 5% plus inflation a year gain I mentioned. It's traditional and often desirable to use non-equity investments like bonds, commercial property and perhaps other things that move up and down less than equities. There's a bit of a catch at the moment because bond prices are quite high, so global and UK commercial property at a higher than usual weighting might be a good substitute for a while.

Really we'd need to know what risks he's trying to reduce. Equities reduce the long term risk of failing to maintain the capital value but have the highest commonly used volatility. If he can deal with what they do a pretty high equity portion - say only 10% bonds - would in theory be good if he expects to be retired for say 30-40 years. More bonds at lower anticipated lifespans.

kingston_dan wrote: »

I would probably invest through hargreaves lansdown as i already use them and don't think they are a rip off even if not the cheapest.

They are pretty expensive for a pot of £200,000. £900 a year if you don't get a discount. You could probably free up an extra £50 a month of income by shopping around and maybe using a place that is cheap to hold with few trades if that is what you expect to do. You could also invite HL to make an offer of say 0.3% capped at £400 to have the business. They do this sort of negotiating/offering for some departing customers and there's no harm in seeing if they will do it to get the business and perhaps come back with something that's still a lot cheaper than £900 a year.

Dunstonh asked about the lump sum and it's a very good question. It's easy to get 10% or more from some P2P investing places in interest and 5-6% is even more readily available. Taxable. This sort of thing can add very useful diversification and higher income than natural equity dividends, if used as an appropriate portion of the total investments, and not concentrated in just one P2P firm either.

His father died about 2 years after drawing his pension so he has been put off annuities.

Annuities have had death protection on them as an option for many years. The changes coming actually improve the death benefits as the restricted options, which were set in legislation, are being removed.

He had a bad experience about 20 years ago when somebody got him to invest £10k in some shares, they then dropped about 20% in a few months, he got worried and cashed out. He was left very skeptical about investing in anything share related. (I did explain that this is where Aviva have been holding his current pension pot which has performed very well but i don't think it quite sunk in!)

This is how his drawdown pot will be as well. A 20-40% drop is quite possible (indeed, if we look back over the last 15 years, he would have gone through multiple drops in excess of 20%).

He would be perfectly happy if the money could be held in a fixed rate savings account and would just spend the interest.

Which of course introduces new risks and would likely to be the worst option going.

Is this possible whilst the pot is still within a pension?

Possible yes but a bad idea.

There are accounts paying 3% fixed 5 years and this would be fine for him.

he would be guaranteeing loss of money choosing that option. The losses in real terms would be far greater than any 20% loss on investments.

It sounds like it could just be best to try and negotiate with the IFA to get his fees down (0.5% per year achievable?).

0.5% is the most common level of ongoing charge.

kidmugsy wrote: »

I would be tempted to lower costs by drawing down once a year, and then spending the money at the rate of £500/month. It could be kept earning interest in the meantime in an interest-bearing current account e.g. at Santander.

I'm a great fan of HL, but they are a bit pricey for £200k.

Could probably negotiate a lower charge with them.

See http://forums.moneysavingexpert.com/showthread.php?t=5120535

Or do you think HL's typical charge is over 2% for fund and platform

It can be very easily.

So how do you know this OP's IFA will arrange anything cheaper than HL?

On a like for like basis it can be.