Annuity or Drawdown

Westbrook

Was looking for some advice really on behalf of a family member.

They are currently 61 and have a pension pot of £100k. Wife is 10 years younger.

The benefit of income drawdown is that the pension pot would still be available if they were to die, whereas the annuity, unless joint life was purchased, would simply stop.

My understanding was that income drawdown was only really looked at by people who had higher pension pots or other means of income, which wont be the case.

Is there any other benefit of the income drawdown that i am missing... presumably if you are taking 5% from the pot each year, your investment return will need to match or exceed this 5% to ensure that the pot doesnt decrease. Also, if you take say 5%, is it simply a matter of receiving £5k over the year, subject to taxation?

Any thoughts or comments would be appreciated. They have sought advice from an IFA who has suggested the income drawdown route

dunstonh

My understanding was that income drawdown was only really looked at by people who had higher pension pots or other means of income, which wont be the case.

10 years ago maybe. Not so much nowadays. However, the risks mean that some people are not able to accept a fluctuating income or the risk of a significant drop in income. Hence why it was often considered only suitable for those with higher fund values and sufficient other income.

Is there any other benefit of the income drawdown that i am missing... presumably if you are taking 5% from the pot each year, your investment return will need to match or exceed this 5% to ensure that the pot doesnt decrease. Also, if you take say 5%, is it simply a matter of receiving £5k over the year, subject to taxation?

More or less that is the aim. However, take too much too early and erosion will become inevitable with inflation requiring greater amounts later. If that is likely then the mortality gain with annuity rates can make them more effective later in retirement.

Any thoughts or comments would be appreciated. They have sought advice from an IFA who has suggested the income drawdown route

Personally, I will be doing drawdown myself. I wouldnt go near an annuity. However professionally, I do far more annuities. The person has to accept that there will be periods they will see their pension fund value drop and their income could go down. If the value of the fund drops by say 25% and they continue with that 5% income, then it becomes 6.66% of the lower value. So, it makes it harder for growth to recover that loss. Not impossible but if you get a slow recovery then the loss may never be recovered before the next decline comes along.

It's all about balancing the different risks with both options and making a decision. It will be a decision that is impossible to know which option will end up being best. Its a judgement call.

kidmugsy

I'd consider the tax position. If he were to take the £25k tax free lump sum and invest it for interest, and take maximum drawdown, would he still be below the threshold for income tax? If so, that's appealing. He could always reduce his drawdown rate when his State Pension begins, in hope of regaining some capital in the pension fund, if that's what he wants to do.

Has he asked for an estimate of how big his State Pension will be? That's a wise move.

ManAtHome

dunstonh wrote: »

I wouldnt go near an annuity.

Dunno whether this may apply to the OP, but would you go for an annuity (or a mix of annuity and drawdown) if it was an impaired life one?

Linton

Of course drawdown has many advantages for the wealthy and sophisticated investor but as the solution for the average retiree it worries me....

You need the skills and motivation/application to manage it properly - or you have to pay someone else to do that for you. In the latter case may you be better off with an annuity, especially with a small pension pot?

You may have the skills/motivation at 65, what about at 85?

If things do go wrong you are likely to be at an age when your ability to handle stress and hassle is seriously reduced.

In my case I expect to take sufficient in index linked annuities to guarantee the essentials for life at my current standard of living with the more discretionary spending handled through drawdown.

kidmugsy

For the pensioner who doesn't want to manage his investments in a SIPP, who finds an index-linked annuity too expensive, and a level annuity too exposed to inflation, is there any merit in buying a unit-linked, or a with-profits, annuity? Does anyone here have any experience of these?