Drawdown v annuity

jamesd

Dithering_Dad wrote: »

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?

Yes, because you don't face the same accounting and actuarial restrictions that insurance companies face, so you can do things like using corporate bond funds instead of 10-25-40 year UK government bonds with maturities to match the expected liability for annuity payments. Insurance companies do still often make use of corporate bonds for some purposes.

You should really be using some equities combined with regular rebalancing of asset allocations so you can make some money during the up times for equities.

It's entirely fine to use part of the fund for annuity purchase either at the start or gradually over many years. Perhaps with different insurance companies to diversify and reduce your exposure to one company. This sort of thing gains increased investment time that's on average going to increase pot value and also gains from the general trend of annuity payout percentages to increase as you get older.

Drawdown is of particular value for those retiring before state retirement age, who can exploit the ability to draw more than an annuity to make up for the lack of the state pensions during the early part of their retirement. This early retirement is also the time when youngest, with the lowest percentage annuity payment rates.

whiteflag_3

EdInvestor wrote: »

Yes, that would come under the heading of phased drawdown. .

Is it? I thought phased drawdown is taking an income made up of income and tax free cash each year.

EdInvestor

whiteflag wrote: »

Is it? I thought phased drawdown is taking an income made up of income and tax free cash each year.

That's right, it involves cashing in part of the fund and the relevant proportion of the tax free cash. Not necessary to do it every year of course. Can be handy in producing an 'income' which is part pension and part tax free cash thus only partially taxable.

Watch out for costs with phased drawdown though.