Is Income Drawdown likely to become more popular?

sandsy

The actuarial profession tables are cohort tables - the expectancy at age 60 increases with the year in which 60 is attained. It also takes account of expected future improvements.

Loughton_Monkey

Well, OK. Thanks for the input. I get the impression that we are going to live longer than I had assumed!

Trouble is, I'm not. The saddest thing is that I am an avid smoker. Pure addiction [No lectures please!]. Neither am I a tee-totaller, being used to two very large G&T's every day - not to mention the copious wine, Champers, etc.

But what do these b*uggers do for annuities? Give you an enhanced annuity if you smoke cigarettes. Well I gave those up mid-70's, to become a confirmed, 20-a-day cigar smoker. Just as hazardous as cigarettes (probably more so) but they probably perceive me as having some weekly puff at a Cuban, and not taking it down!

So currently, I'm thinking, that the pensions I have left, I should take drawdown - maximum amount - and make the assumption that I will not be alive to buy an annuity at 77! Or maybe I shouldn't buy pensions at all.
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jamesd

For those who can accept the risks I think it's pretty clear that drawdown is a better deal and that it's going to continue to gradually become an even better deal than annuity purchase. The reasons are the limitations of annuities and regulation:

1. Good or bad value reported compared to gilts, not a reasonable mixture of investments, so studies that report them offering good value are inherently biased in favour of annuities. Hence, so are government policies that are based on such reports instead of more balanced mixtures of investments.
2. Investment and liquidity constraints that seem often to force annuity providers to make investment decisions that are safe but offer poor returns.
3. Future events in regulation that seem likely to further harm the ability of annuities to compete.
4. Only 0% shortfall in payment levels acceptable.

There's a cross-subsidy of those who live a long time by those who die early but it seems to be getting increasingly difficult for that to compensate for the limitations imposed on annuity company investments.

The 0% shortfall requirement effectively forces annuity companies to make poor investment decisions to be sure that the payments will be made, yet for many cases it's not necessary for there to be a no shortfall guarantee. Some way to offer a higher payout in exchange for some acceptance of reduced payout risk might offer a way forward. Perhaps a 0% shortfall guarantee subject to some defined and regulator monitored investment performance with some predefined shortfall acceptable if the investment performance consistently lags the standard. Effectively, a form of insurance excess, but not certain to happen, that allows a measure of controlled investment risk.

With that sort of product in the market people could choose an annuity that offers more investment flexibility, with higher expected payout, sized so that the 95%, 90%, 80% or 70% guarantee level would still be sufficient to cover essential needs if there is long term poor investment performance, while in non-exceptional circumstances getting the 100% payout. This then lets the annuity company not have to plan for 100% cover during market meltdowns and other extreme stresses.

jamesd

I don't think there's much chance of me choosing to buy much of an annuity if given a free choice. It seems like a foolish waste of money given that I'm comfortable using investments. Maybe for a small portion where I might want a 100% payout guarantee that would apply even in an extreme 90%+ market collapse situation.

hugheskevi

I don't intend to use annuities either.

Index-linked annuities are very uncompetitive, and I don't see the point of exposing myself to inflation risk for 20-30 years by purchasing a non-escalating annuity - anything could happen in that time. I see drawdown as the 'safer' option over annuitisation as I can choose which risks I expose myself to at all points in time (for better or worse).

If rates improved, I could be persuaded to perhaps buy a small, index-linked annuity to serve as foundation income, ie, safe in all circumstances.

Mortality drag doesn't really have much of an impact until post 70 with current mortality rates.

I think the main reason I'd choose to buy an annuity would be when I stopped trusting myself to manage investments (age gets to us all).

For me, that all adds up to a strategy of a couple of decades of drawdown, followed by annuitising whatever is left at some point in my 70s - probably trying to lock into an annuity at a point when gilt yields are looking high.

I wonder how the new pension rules from 2012 will affect things - there will be a lot more relatively small pots out there to be annuitised in a few years. I wonder if the market won't divide into annuities for those with small pots and relatively little choice, and drawdown the norm for bigger pots.

wotsthat

Loughton_Monkey wrote: »

The saddest thing is that I am an avid smoker. Pure addiction [No lectures please!]. Neither am I a tee-totaller, being used to two very large G&T's every day - not to mention the copious wine, Champers, etc.

As George Best said "I spent a lot of money on booze, birds and fast cars. The rest I just squandered"

I reckon this is the wrong place to ask the question about drawdown becoming more popular. Most visitors here are likely to be sold on drawdown simply because it allows a way to keep control of their pension pots. To me it seems a riduculous notion that I'd 'give away' my pension savings after spending 40 years carefully building them up.

Whether it becomes more popular in the general population is doubtful. It still seems a surprise to many that annuities can be purchased from others apart from your pension company. To these I'm sure drawdown will still seem like a dark art.

Stargazer57

hugheskevi wrote: »

I don't intend to use annuities either.

From such a sensible poster, this had me worried...but only for a minute...

hugheskevi wrote: »

For me, that all adds up to a strategy of a couple of decades of drawdown, followed by annuitising whatever is left at some point in my 70s - probably trying to lock into an annuity at a point when gilt yields are looking high.

Sounds like you are intending to use an annuity at the right age.

hugheskevi

Sounds like you are intending to use an annuity at the right age.

True - I suppose I will be using annuities although I always view myself as firmly in the drawdown camp...I think I betrayed the way I personally view my retirement here - the period before my mid 70s when I have very clear plans, and the period after 75 which I have effectively discounted to very little