Are there any safe options to an annuity?

Paul_Herring

dunstonh wrote:

A pension sharing order would give that part of the pension to the partner. It would remain within the pension. i.e. a £100k personal pension where a 75% sharing order is made would see £75 moved into a pension in the partners name. It is not made available in cash.

Then can I take it everyone's assuming the amount concerned is below the 1% lifetime limit to count as a small pension? I'm just wondering why no-one's checked to make sure that this is the case. Morvan, is the amount concerned above or below £15,000? (I'm assuming you have no personal pension provision of your own?)

Morven

Then can I take it everyone's assuming the amount concerned is below the 1% lifetime limit to count as a small pension? I'm just wondering why no-one's checked to make sure that this is the case. Morvan, is the amount concerned above or below £15,000? (I'm assuming you have no personal pension provision of your own?)

Thanks for the thought but the amount is quite a bit above that figure.

Paul_Herring

Morven wrote:

Paul wrote:

Then can I take it everyone's assuming the amount concerned is below the 1% lifetime limit to count as a small pension? I'm just wondering why no-one's checked to make sure that this is the case. Morvan, is the amount concerned above or below £15,000? (I'm assuming you have no personal pension provision of your own?)

Thanks for the thought but the amount is quite a bit above that figure.

Then you won't have access to (all of) the money to "put into a savings account" I'm afraid (excludes the 25% you may withdraw tax free from such a fund.)
You are stuck with using the other 75% to purchase an annuity/ASP/Drawdown/SIPP. I'll leave the IFA's and EdInvestor to argue between themselves about the pro's and cons of each. If you want to see what they'll say about the subject before they post, then feel free to search for threads involving the word drawdown or SIPP. It's a frequent occurance.

lilac_lady

Can you still draw the 25% tax free sum if it's an actual pension that's being split? ie. 25% was drawn when the pension was first taken but now it's being split and shared.

EdInvestor

dunstonh wrote:

Income drawdown is a risk option and should not be considered safe. Any financial adviser recommending it as a safe option would face sanctions when found out.

This is a common misconception in the advisor community.The risk aspect of a drawdown depends on what it's invested in and how much income is taken.A fund in drawdown invested in gilts where the income taken is the same as the gilt yield is less risky than an annuity AND you don't lose the capital. A drawdown invested in cash where the income taken is the same as the interest paid is as safe as a savings account.

Do not assume that all drawdowns are invested in high risk assets and paying out the maximum income.

dunstonh

The FSA treat it as high risk. The underwriters treat it as high risk and advisers are told to treat it as high risk. Ed says it isnt. Its up to you decide what it is if you DIY.

EdInvestor

I said it need not be high risk.The FSA operates on the basis that all drawdowns will involve advisors (this immediately increases the risk as their charges eat up the income), will have high charges and will be invested in higher risk assets.

These assumptions are out of date.

One should perhaps also point out that in all other comparable countries (eg the US, Canada, Australia) where personal pensions are widespread, income drawdown is the norm, and annuities are minority products of interest to only a few.It is only because the UK Government in the past forced people to buy annuities that people think it is normal to do so.It isn't anywhere else.

The UK is generally very backward in financial services - most other countries gave up With profits investing decades ago for instance, whereas it's only now being phased out here.The UK has much higher charges,fees and commissions than elsewhere as well - the normal annual fee for a mutual fund in the US is 0.5% , here it's three times that at 1.5%.

There is far more misselling here than elsewhere as well.

dunstonh

There is far more misselling here than elsewhere as well.

Rubbish. The UK has far higher regulation than anywhere else and far more consumer protection than anywhere else. caveat emptor exists in most other countries so they would not have anywhere near the same level of real mis-sales. This country also suffers more rules, laws and tax wrappers than any other in the world. It is the most complex system there is.

These assumptions are out of date.

You have never given any of the risks in your posts about income drawdown. I do wonder if you realise what risks exist and that is why you say there arent any? Why dont you give us a list of the pros and cons for a change with than just the positive points?

I said it need not be high risk.The FSA operates on the basis that all drawdowns will involve advisors (this immediately increases the risk as their charges eat up the income), will have high charges and will be invested in higher risk assets.

Thats an incorrect assumption. A correctly arranged portfolio is likely to cost you more than a DIY one but how many people are likely to be in the position to know how to arrange the correct portfolio for their risk and yet still have a chance of achieving critical yield? A badly arranged portfolio will cost more than a correctly arranged one in the long run.

EdInvestor

dunstonh wrote:

Rubbish. The UK has far higher regulation than anywhere else and far more consumer protection than anywhere else. caveat emptor exists in most other countries so they would not have anywhere near the same level of real mis-sales.

I agree that the general public elsewhere is better educated about investing than here: at the same time you only have to look at the number of people who ended up in jail over the financial scandals of the dotcom era in the US ( loads) compared with here (nil) to know that there's a big difference between having a lot of rules and actually enforcing them.

You have never given any of the risks in your posts about income drawdown. I do wonder if you realise what risks exist and that is why you say there arent any?

The level of risk can vary massively from virtually nil to very high.Drawdown is just a pension wrapper after all.The risk depend on what the investments return, what income you take, what costs are charged.There is no generic level of risk in a drawdown as there is with a level annuity, where you can calculate how much your income will be cut by inflation. After 20 years it will be half what it is now at current rates of inflation. :eek:

Don't you think it's a massive punt on the future for people to assume that their income will be only half in 20 years time, because inflation will be always at today's level? If it went up to 10%, your pension would buy virtually nothing in 10 years.I find that very scary. Level annuities combined with longer life expectancy are IMHO a highly risky mix.A properly constructed drawdown on the other hand offers the opportunity of having a growing income to protect against inflation without necessarily incurring high risk.

....but how many people are likely to be in the position to know how to arrange the correct portfolio ...

This site is for people who want to learn about savings and investment isn't it? It's not rocket science: if it were IFAs would all have PhDs.;)

critical yield

This concept might have been invented especially so as to prove that income drawdown is high risk.It is a way of calculating how high a return the drawdown's investments would have to make to match the income from an annuity.

But it completely fails to take into account the value to the investor of not losing his or her capital, and the likely trade-off such an investor will make in the form of a lower income.It also ignores the possibility nowadays of a reduction in advisor and other investment charges to virtually nil (a cut of 2% here will make a massive difference to the viability of a high paying drawdown).

Critical yield IMHO is a false concept based on a misunderstanding of why many people want to do drawdown in the first place.

Pal

EdInvestor wrote:

A fund in drawdown invested in gilts where the income taken is the same as the gilt yield is less risky than an annuity AND you don't lose the capital.

Are you suggesting that the face value of Gilts cannot fall, reducing the value of your capital?