Alternatives to Annuities

Loughton_Monkey

bristol_pilot wrote: »

I would rather have 4% variable and access to capital than 6.3% fixed and lose the capital. Annuity rates are usually fixed at purchase, whereas deposit interest rates are currently at historically low levels at present due to historically low base rates which can only go in one direction going forward. Only the timing is in doubt. Fixing on an annuity at 6.3% would be a disaster if we return to interest rates of 10% in the future. Plus, at 65, one may not have that much lifespan left and the option to spend the capital while I can still enjoy it is a definite plus.

It's easy to work out. If you and I are both 65, as has been said, assume we can get an annuity of about £6,300 on our £100K.

If, however, you invest yours at 4%, and draw down the same as me (£6,300) then you will run out of money more or less just before your 89th birthday. Interestingly, though, if you can invest at 5% - just another 1%, then you can survive until 95½.

It seems to me a very reasonable 'punt' to assume that some carefully selected funds would deliver more than 5% on average over a decent retirement term - making drawdown more lucrative.

By doing a few "What if...s", though, it informs me that volatility in the markets does more than you would think. I have done calculations where a cycle of "ups and downs" (very typical ones for the markets) which still produce 5% on average for a single fund can in fact give you around 5 years less on a drawdown arrangement. It is easily explained, because when there is a large fall (say 15% in a year), and you draw your annual amount out, you are leaving less in there to benefit from the (usuallly inevitable) healthy bounceback.

In assessing using drawdown for some of my funds, I am coming to the conclusion it makes an awful lot of sense, but it would be very wise to draw down a bit more in 'good' years, but less, or even zero, in 'bad' years.

jamesd

taking_stock wrote: »

does anyone know if the 25% tax-free PCLS may still be taken if one chooses the flexible drawdown option?
say for example, i met the £20k pa MIR through an annuity, could i then take 25% tax free from my SIPP and 'withdraw' the remainder of the SIPP at my marginal income tax rate?

I didn't see any change in this and since the plan lets you switch from capped drawdown to flexible drawdown after taking he lump sum it seems most unlikely that the capability is removed.

What is removed is the ability to get pension contribution tax relief after starting flexible drawdown. You might consider taking out an offset mortgage to get access to the capital and repaying out of capped drawdown income if it's possible that you could benefit from tax relief. Whether this pays depends on the available tax relief and mortgage interest rates. it's potentially also of use if you'd use flexible drawdown to take you into the 40% income tax bracket, since you could draw the income fro the mortgage and repay the mortgage lter out of capped drawdown income or after death.