Drawdown v annuity

DRAWDOWN_OPPOSER

IN 2000 I was advised to go for a drawdown rather than an annuity.Being a trusting person I took this advice It is a complete disaster and from what I have learned since ,buyer beware.Chase De Vere have recently been fined 1.6 million by the FSA for misselling drawdown schemes.The commission for a drawdown scheme is approx close to six times that of an annuity or at least it was in my case.If I was to take out an annuity now it would be 60% less than an annuity taken out in 2000 and I have been drawing out only 80% of the amount the annuity would have paid.Drawdown schemes are a gamble and are totally useless for anyone relying on them for their sole income.I have just spent two years on a complaint to the FSO re the misselling of the drawdown and the company were found guilty and totally incompetent in their advice re my particular needs and circumstances The FSO suggested they put me back in the position I should be in back in 2000 this would have cost them in the region of £250000 to reinstate the pension they chose to pay the max award that the FSO has the power to order ,£100,000 compensation but I still had to take out an enforcement order to make them pay up.So to all who are considering drawdown schemes take advice,advice ,advice and make sure you fully understand what your requirements are and that you are basically relying on the stock market .

dunstonh

Drawdown schemes are a gamble and are totally useless for anyone relying on them for their sole income

I wouldnt be quite as strong as that but generally you will find the advisers on the board here will agree with your general view. In fact, its the non advisers here that tend to promote drawdown more than annuity.

Personally, I would do drawdown on my own pension. Most experienced investors would as well. However, we do far more annuities than drawdowns as the average person doesnt have the risk profile and/or other sources of income.

Chase de vere deserved their fine and were a disgrace with what they were doing. Chase have an extremely poor reputation on most of their companies in the UK.

and that you are basically relying on the stock market .

Not necessarily. You can use lower risk, high yielding investments in the portfolio. Indeed, ideally you wouldnt want to be too heavy in equities and in reality you dont need to be.

EdInvestor

DRAWDOWN_OPPOSER wrote: »

I.So to all who are considering drawdown schemes take advice,advice ,advice and make sure you fully understand what your requirements are and that you are basically relying on the stock market .

Sorry to hear about your experience, but the risk level in a drawdown relates to the way it is invested.There is no requirement to invest in the stockmarket - a drawdown can be wholly invested in gilts and cash if you wish.

It's up to the individual investor and his/her attitude to risk.

History suggests drawdown problems are caused mainly by poor advice than by any basic flaws in the product itself.

Dithering_Dad

If one doesn't invest in equities, would the return from a 'safe' drawdown investment be able to match the income from a guaranteed annuity?

If it doesn't, then why would any pensioner want the additional worry of investing? (apart from professionals such as dunstonh who might want to 'keep their hand in' post retirement - though you soon get out of touch from your industry, so perhaps even for these guys it might not be such a good idea).

peterg1965

Isn't one of the major attractions of drawdown the fact that the value of the drawdown pot becomes part of your estate on death, and therefore can be passed on in full (minus taxes if applicable), which is why you cannot have drawdown beyond your 75 birthday?

Dithering_Dad

peterg1965 wrote: »

Isn't one of the major attractions of drawdown the fact that the value of the drawdown pot becomes part of your estate on death, and therefore can be passed on in full (minus taxes if applicable), which is why you cannot have drawdown beyond your 75 birthday?

Surely that's only an attraction if drawdown also gives you a similar return as an annuity?

Otherwise all you're doing is impairing your retirement in order to 'feather the nest' of your middle aged children, who, if you brought them up right, should already have enough money in their own right?

dunstonh

History suggests drawdown problems are caused mainly by poor advice than by any basic flaws in the product itself.

Thats the case with so many products though. Not the product at fault but the way it was sold.

If one doesn't invest in equities, would the return from a 'safe' drawdown investment be able to match the income from a guaranteed annuity?

You really need to have some equity exposure but you dont need to go gung ho.

If it doesn't, then why would any pensioner want the additional worry of investing? (apart from professionals such as dunstonh who might want to 'keep their hand in' post retirement - though you soon get out of touch from your industry, so perhaps even for these guys it might not be such a good idea).

In drawdown, your pension pot can pass to your spouse. Spouse annuity rates are not very good so an income drawdown rate can equal or better that. On second death (i.e. after both of you have died) the pot can then be used to go to your dependents. Also, you can draw more as you get older, providing the fund doesnt erode too much. So, against indexed annuities, it can be attractive.

Drawdown rates are similar or higher than annuities. Indeed, you can draw out more than you need, feed the surplus into ISAs and build up a tax free lump sum for use later in life for capital purchases. It may drain the pension quicker but the ISA goes up to compensate.

Phased income drawdown can also be tax efficient.

The problem with retirement income options is that you are taking a guess on what option is going to be best. The future is unknown so you cant tell what option is going to be best financially. In some periods a high equity content drawdown will be better than a low one and vice versa. In some periods annuity purchase can be better. You also have the unknown variable of your date of death. The only thing you do know at the point of commencement is your risk profile and your ability to be able to afford certain risks. That is why advisers normally only recommend drawdown for higher risk individuals with the ability to be able to afford it. It is also why Chase got taken to the cleaners by the FSA.

You can also purchase short term annuities within a drawdown arrangement.

Dithering_Dad

Actually, to be fair - if everything works out in my current job and I stay for a long period I'll receive a 1/60th final salary and will be able to be a bit more relaxed with the money purchase pot I've already accrued.

Is there any way to 'hedge your bets' if one has a single money purchase pension pot - i.e. use 50% of the pot to purchase an annuity and leave the remainder in drawdown?

peterg1965

Dithering_Dad wrote: »

Surely that's only an attraction if drawdown also gives you a similar return as an annuity?

Otherwise all you're doing is impairing your retirement in order to 'feather the nest' of your middle aged children, who, if you brought them up right, should already have enough money in their own right?

Maybe, but presumably it can also be passed to a surviving spouse. I think I will use drawdawn at 55 as it means I remain in control of MY money and do not hand it all over to an annuity provider. It will give me the flexibility to invest my money in the areas I choose, presuming the same range of investment options can be used post drawdown, which can include less risky gilts and cash. My drawdown pot will be in addition to a variety of other final salary pensions that my wife and myself will have so I may make the decision not to drawdown every year dependant on whether I need to money.

I think also that the maximum amount it is possible to drawdown every year, based on the GAD (Govt Actuary Department??) figure may be more generous than a level annuity (I could be wrong and will no doubt be corrected). The drawdown will also plug the financial gap for me between retiring at 55 and drawing the state pension at 66. So even if I erode the capital during drawdown for me that will not be a problem as my overall income will hopefully remain constant.

Having said all that, I will make my drawdown vs annuity decision in 2020 (at 55) when the financial landscape could be markedly different than it is now!

EdInvestor

Dithering_Dad wrote: »

Is there any way to 'hedge your bets' if one has a single money purchase pension pot - i.e. use 50% of the pot to purchase an annuity and leave the remainder in drawdown?

Yes, that would come under the heading of phased drawdown. You could also invest half the drawdown in gilts -same as an annuity - and the rest in risk based assets such as equities, property funds etc,which will tend to grow over the longer term and provide a hedge against inflation.

EdInvestor

peterg1965 wrote: »

I think also that the maximum amount it is possible to drawdown every year, based on the GAD (Govt Actuary Department??) figure may be more generous than a level annuity (I could be wrong and will no doubt be corrected).

Correct,it's 120% of the annuity rate for your age.