drawdown - or not

exstokie

Looking for opinions on my situation please.

I'm 68 self employed still working, still paying in to pension. Pot is app 80,000 at present.

Getting state pension plus a small pension from another provider.

My pension is in equities and I think that as the Stock Market is so high it may adjust sooner rather than later so think that I should do something quickly now.

I have done a bit of reading and obviously feel concerned that if I go for drawdown that I could run out of money But if I took as much as allowable and if I had any spare could put that in to ISA's for later. If the Stock Market crashes then I suppose I will be in queer street. I presume that if you have it in drawdown then it needs to be invested in the SM in order to get enough return - or am I missing something. If it was put in something safe will the return be poor?

Would drawdown be a better bet than buying an annuity now but buy an annuity if and when they rise.

Saw an IFA but his knowledge was sadly lacking on various points so decided I would sort it out myself. :rotfl:

I would be pleased to hear others opinions.

Bob

jamesd

It's hard to run out of money in drawdown unless you deliberately try to do it by making extremely poor investment decisions. The requirement for adjustments of the drawdown limit every three years until age 75 then every year means that losses will reduce the income that can be taken, limiting the chance of running out of money.

Some stock markets are fairly high, like the US and UK. Others like those in mainland Europe and emerging markets aren't anywhere close to highs. One of your available options is to invest in places where the markets aren't at high levels.

Assuming your life expectancy is normal, one good investment option you have is to start deferring the state pension. That will cause it to increase by 10.4% a year, pro-rated for less. You can do this exactly once in your lifetime even if you have already started taking the pension. One to three years of deferring is likely to be reasonable for a man, the longer period for those with higher life expectancies. The result is effectively an annuity bought at very low capital cost compared to buying a real annuity with RPI increases.

You can increase your financial flexibility by taking a 25% lump sum now and investing that within a stocks and shares ISA as rapidly as the annual allowance lets you. Investments like Invesco Perpetual Monthly Income Plus or Invesco Perpetual Distribution may be worth looking at within the ISA to provide income.

You can use a similar but broader range of investments within the SIPP in drawdown.

You're too young for a standard annuity to be a good deal. They don't start to pay out well until some age between75 and 80 or so, when the cross-subsidy from those who die early to those who live a normal or longer life starts to become more significant.

It isn't certain that annuity pay rates will rise, even though they do normally increase with age and should in theory increase whenever quantitative easing ends. The difficulty is that other things could affect them and QE could last for many years.

You also have the option of taking pension income and recycling it into new pension contributions. Then you can gain by getting a second tax free lump sum.

You can protect yourself from running out of money by keeping a few years of total investment income in a savings account. Use the income from drawdown to top this up and don't take more than 5-6% as income even if you're drawing more than that at the maximum permitted rate from the pension to get it out of the pension into the more flexible ISA tax wrapper.

The_Bhoy_3

It is very risky to have your whole pension in equities as you approach retirement since, if the market falls, you don't have much time for it to recover. Considering that a drop in value has a bigger impact than a gain (a 30% fall would then require a 43% rise just to breakeven), it is worth considering having a more balanced investment portfolio that gives lower volatility and can just compound over the next few years.

jamesd wrote: »

Some stock markets are fairly high, like the US and UK. Others like those in mainland Europe and emerging markets aren't anywhere close to highs. One of your available options is to invest in places where the markets aren't at high levels.

I wouldn't recommend making investment decisions simply based on the level of the market. The US is more expensive for a good reason (better growth prospects), whereas Europe and EM aren't back at previous highs because there is still a lot of risk and uncertainty around their outlook.

atush

If you aren't buying an annuity, but do plan on using drawdown, it isn't so risky to still be in equities in your pension. As there will be time for it to recover. What % of equities will depend on other things such as your side of pension cash/investments.

BLB53

Would drawdown be a better bet than buying an annuity now but buy an annuity if and when they rise.

I looked into this last year and decided the rates offered on annuities were pretty much a joke at present ( probably to do with all the QE).

I decided to convert to income drawdown and invest in a range of investment trusts paying an average of around 4.3% income and which should rise year-on-year to keep pace with inflation. I suppose you could say its a sort of index linked annuity substitute.

They are increasing the GAD rates back to 120% next week so you should be able to take a reasonable income without depleting your pot. You also have the option of an annuity later if desired.

A good ebook I saw recently (monevator) is "DIY Pensions" which covers this sort of situation - here's the link on Amazon http://www.amazon.co.uk/D-I-Y-Pensions-ebook/dp/B00B7QN8XM/ref=sr_1_1?s=digital-text&ie=UTF8&qid=1364034542&sr=1-1

jamesd

The_Bhoy wrote: »

I wouldn't recommend making investment decisions simply based on the level of the market. The US is more expensive for a good reason (better growth prospects), whereas Europe and EM aren't back at previous highs because there is still a lot of risk and uncertainty around their outlook.

True, though it is worth knowing that P/E or PEG rates do have good inverse correlation with future returns and the values are fairly high in the US particularly at the moment. Which does imply that it's not a great market for longer term prospects at today's prices. But still room to rise for a while yet.

I'm not selling or shorting (to compensate for global fund holdings) the US market at the moment. Just not looking to increase weighting in it.