Retirement Questions

choi · 16 June 2017 at 11:36AM

Hi
Im retiring very soon now and need some advice

Annuity or Draw Down

Im inclined to go for an annuity for peace of mind

Anyone made the opposite decision and acheived long term success

Annuity
Is it better to go for the fixed sum annuity for the rest of my life
Or an annuity that increases with inflation

Are there any other ways to improve the annuity
over the length of my life

I also want to include my wife in the annuity so it runs after my death [she is 6 years younger than me
Any advice much appreciated

I also have a sum of cash to invest
What options are open
I dont want to tie the cash up for more than a year at a time

dunstonh · 16 June 2017 at 12:03PM

Anyone made the opposite decision and acheived long term success

Yes they have. Drawdown has been around a long time. However, there are some that have made a pigs ear of it too.

Is it better to go for the fixed sum annuity for the rest of my life
Or an annuity that increases with inflation

Depends on your spending habits and other income you may have in retirement as well as your age and that of your spouse.

Are there any other ways to improve the annuity
over the length of my life

Use an IFA. IFAs get the best rates unless the fund is less than around £25,000

I also have a sum of cash to invest
What options are open
I dont want to tie the cash up for more than a year at a time

Modern investments do not tie the cash up. However, the expectation should be that you leave it for the long term.

Loads of options potentially available. Too little info to really narrow down. One observation is whether you have the knowledge, experience and understanding to be doing all these things DIY or whether you should be using an IFA?

bostonerimus · 16 June 2017 at 12:16PM

It's not an either or choice......you could annuitize an amount to guarantee a basic income and do drawdown with the rest to have some flexibility and the chance of more income. It's difficult to come up with any firm recommendations without knowing the size of your pension pot, other investments, state pension situation, age, marriage status and how much you need to live on.

choi · 21 June 2017 at 11:05AM

Hi
My fund is £255,000
What kind of return could I get on this from drawdown
I have a state pension of £155 pw
I own my house
I have other savings of £100 k which i want to keep separate

How long would the fund last if I took £10k per year adjusted for inflation
What would it cost to run

Would I be better with an annuity

dunstonh · 21 June 2017 at 11:18AM

What kind of return could I get on this from drawdown

Depends on a number of factors. Anything from 1% to 7% really depending on the factors in question.

I have other savings of £100 k which i want to keep separate

Why? It may well be more tax efficient to bring those into play. (tax efficiency meaning less tax paid and therefore your money value going down less).

How long would the fund last if I took £10k per year adjusted for inflation

Remember that drawdown is a risk based transaction where the investment rate of return is not consistent. You have years of gains, losses and nothing years. Every generation there is also a significant loss event or two which can completely throw you out. At medium risk investing or higher, I would like to think £10k a year gross is sustainable from £255k but nothing is guaranteed.

Would I be better with an annuity

Depends. We don't have enough to go on. You are asking us for solutions without us knowing anything about you. You don't seem to want joined up financial planning either as you have this £100k you call savings that you want to keep separate. Yet, it may be sensible to have some of the income from that. £100k in savings and £255k in pension is £355k. If you take £5k from the pension then the value goes down £5k just as it would if you took it from the savings. What if wanting £5000 out costs you £6250 from the pension but £5000 from the savings (i.e. taking it from the pension means your net value goes down £1250 more).

Combining annuity and drawdown is quite popular.

xylophone · 21 June 2017 at 11:27AM

You might want to seek professional advice.

https://directory.moneyadviceservice.org.uk/en

bostonerimus · 21 June 2017 at 11:43AM

What is your need for income......have you done a detailed budget?
All I can offer is a very generic statement about a possible withdrawal rate form your 255k pension pot. If future stock and bond market returns are statistically similar to those in the past and you hold a 60% and 40% equity to bond allocation then there is a 95% probability that you will be able to withdrawn an initial 3.5% index linked amount every year for 30 years....so that would be 9k. If you have investing expenses and fees they will reduce that amount.

I'd get some RPI linked joint annuity quotes, but if you are around 65 and your spouse is a few years younger expect initial payout rates of around 3%. You'll get a guarantee with an annuity, but also lose flexibility and access to the capital in your pension pot. You might want to think about using an annuity to compliment your state pension and give you a guaranteed income floor and then use drawdown for "gravy" as it has the potential to give you more income than an annuity, but you could also lose money as well.

Silvertabby · 21 June 2017 at 12:03PM

but you could also lose money as well.

bostonerimus - that's why the protections were introduced. People who know nothing about investments just see a magic 'pot' of money that could be in their bank account instead of in the hands of a pension scheme.

Do you have final salary schemes in America? I'm a retired LGPS (Local Government Pension Scheme) adminstrator, and when the pension 'freedoms' were announced we were swamped with requests from pension fund members - both current and deferred - who wanted to transfer their final salary benefits into 'cash it in and spend it now' personal pensions.

As an administrator, I could only offer information and not advice - but I could and did explain the benefits they were giving up and asked why they wanted to do this. Time after time, the reply would be 'the money is better off in my bank account than the Council's', or 'I want to spend it now when I can enjoy it' or 'my son/daughter wants it for a house deposit'.

On the whole, these were manual workers who had never seen such sums of money and who were so entranced by the sums quoted that they couldn't/wouldn't see what they were giving up - ie, death and ill-health benefits, a guaranteed index linked pension (with spouse's benefits on death) for life, etc etc. Many decent IFA's wouldn't sign off the transfers, presumably because they could see the trouble ahead, but there were many unscrupulous fly-by-night pension advisory services who would and did. Of course, when the money runs out, these boys won't be around to pay compensation for bad advice.

bostonerimus · 21 June 2017 at 12:46PM

Silvertabby wrote: »

bostonerimus - that's why the protections were introduced. People who know nothing about investments just see a magic 'pot' of money that could be in their bank account instead of in the hands of a pension scheme.

caveat emptor.......the UK has historically made it expensive and complex to mange DC pension money. There need to be simpler products developed, more consumer education and costs slashed, but personal responsibility needs to be taken. The UK investor needs to take far more control of their money rather than giving the banks and the pension companies so much control.

Do you have final salary schemes in America? I'm a retired LGPS (Local Government Pension Scheme) adminstrator, and when the pension 'freedoms' were announced we were swamped with requests from pension fund members - both current and deferred - who wanted to transfer their final salary benefits into 'cash it in and spend it now' personal pensions.

As an administrator, I could only offer information and not advice - but I could and did explain the benefits they were giving up and asked why they wanted to do this. Time after time, the reply would be 'the money is better off in my bank account than the Council's', or 'I want to spend it now when I can enjoy it' or 'my son/daughter needs it for a house deposit'.

I am an ex-state employee.....so we are both local government retirees. It is not possible to cash out of our DB plan. The IRS has strict rules governing DB plans and generally it's only possible to transfer out when the amounts are small and the lifetime pension would be trivial. When I retired I actually had a one time opportunity to convert my state DC money into the DB plan. I was in the DC plan as the DB plan has a 10 year vesting period and I was not sure I would work there for that long. But I did get to 10 years and took $280k of my DC accumulation and transferred it to the state pension trust. That bought me an index linked $20k pension starting at age 55...so a 7% index linked payout for probably 30 years.

On the whole, these were manual workers who had never seen such sums of money and who were so entranced by the sums quoted that they couldn't/wouldn't see what they were giving up - ie, death and ill-health benefits, a guaranteed index linked pension (with spouse's benefits on death) for life, etc etc. Many decent IFA's wouldn't sign off the transfers, presumably because they could see the trouble ahead, but there were many unscrupulous fly-by-night pension advisory services who would and did. Of course, when the money runs out, these boys won't be around to pay compensation for bad advice.

I would require people to attend a training course before cash out. I would give them the tools to make a sensible decision and the respect to let them do what they consider best. I don't see a need to mandate an IFA in this, but people should obviously seek out that advice if they feel that they need it.

Linton · 21 June 2017 at 1:03PM

bostonerimus wrote: »

.......
I am an ex-state employee.....so we are both local government retirees. It is not possible to cash out of our DB plan. The IRS has strict rules governing DB plans and generally it's only possible to transfer out when the amounts are small and the lifetime pension would be trivial. .....

So the US is more restrictive on what people can do with their money than the UK. Who would have guessed it from your previous posts? Perhaps the US can learn something from the UK as there are circumstances when transfering out of a DB scheme could make a great deal of sense.

bostonerimus · 21 June 2017 at 1:09PM

Linton wrote: »

So the US is more restrictive on what people can do with their money than the UK. Who would have guessed it from yor previous posts. Perhaps the US can learn somthing from the UK as there are circumstances when transfering out of a DB scheme could make a great deal of sense.

Not in general. The US is usually more permissive when it comes to investing......but, there aren't such generous tax free accounts as ISAs. Of course there is a patchwork of federal and state regulation in the pension area, however, the risk pool and mortality credits inherent in the success of a DB plan mean that they are tightly regulated and there is no general freedom to transfer out.

I have a serious issue with being able to cash out of a DB plan in the first place...it undermines the whole structure. But if that is going to be an option then it should be made as inexpensive and simple as possible.

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