Do I have to buy an anuity or income drawdown?

jamesd

zygurat789 wrote: »

Bear in mind that investments may and have gone down as well as up, reducing the value of your fund and hence the value of the % you are allowed to draw and the fund may be depleted long before you die.

Lets consider what it takes to deplete to zero the fund when the drawing limit is 5% of the fund value:

1. Losing 85% of the money in the investments.
2. While continuing to take the 5% income for three years until the next GAD calculation.

An 85% drop is about twice the drop expected during a major collapse of a major developed market so to get to that level requires putting almost all of the money in things like natural resources and emerging markets funds. People can do that but it's not prudent for someone relying on the income to do so.

The prudent ones will have enough cash somewhere for a year or three's investment income, so they won't be needing to do any selling during the down time but can live solely on the cash and income generated. They will also have a fairly broad range of investments in different markets and types of investment so that drops in one market won't cause an overall loss of even the 45% developed market level.

It is possible to run out of money in a drawdown pot but it takes work.

zygurat789

jamesd wrote: »

The prudent ones will have enough cash somewhere for a year or three's investment income, so they won't be needing to do any selling during the down time but can live solely on the cash and income generated. They will also have a fairly broad range of investments in different markets and types of investment so that drops in one market won't cause an overall loss of even the 45% developed market level.

It is possible to run out of money in a drawdown pot but it takes work.

So it is prudent to have three years income in cash. I don't call that prudent I call it very bl--dy rich.
I thought it was not work which caused this but lack of attention.

The point is it is very easy to take more out of a fund than has been generated by income and if capital values fall then the value of income, a percentage of the fund, is also reduced whereas the annuity gives you a certain amount for life. Which is very comforting when you are at a vulnerable time in life.
I do not make any judgement as to which is better, conventional wisdom says one of each, I couldn't argue against that.

jamesd

Not three years of income. Three years of whatever income the investment will be used to produce, which means less than 15% of the money at age 55. And that's a bit on the high side just for protecting income, one to two years provides pretty good protection even from quite long-lasting drops.

It's not that easy to take out more than the produced income at 55, the GAD limit then is below the long term stock market total return, so an increase in value is more likely if invested that way. Easier to do it at older ages when you can take out say 15% of the value each year, but then you get annual GAD limit checks so it's still hard to get to zero value.

Lack of attention isn't enough to run out of money, barring some truly exceptional cases (tiny pot values and high fixed costs maybe). You have to actively do foolish things to lose the money before the next GAD limit calculation.

zygurat789

jamesd wrote: »

Not three years of income. Three years of whatever income the investment will be used to produce, which means less than 15% of the money at age 55. And that's a bit on the high side just for protecting income, one to two years provides pretty good protection even from quite long-lasting drops.

It's not that easy to take out more than the produced income at 55, the GAD limit then is below the long term stock market total return, so an increase in value is more likely if invested that way. Easier to do it at older ages when you can take out say 15% of the value each year, but then you get annual GAD limit checks so it's still hard to get to zero value.

Lack of attention isn't enough to run out of money, barring some truly exceptional cases (tiny pot values and high fixed costs maybe). You have to actively do foolish things to lose the money before the next GAD limit calculation.[/QUOTE]

GAD james I wish I was 55 again.
But the investment IS used to produce the income that is its raison d'etre
And which of us hasn't done foolish things to lose money?
The point is an annuity is known and no amount of foolish acts can reduce the income.

atush

What figures are we talking about here?

So it is prudent to have three years income in cash. I don't call that prudent I call it very bl--dy rich.

Say you are expecting income of 15K per year, incl SP. So are taking 10K from a DD pot? So you'd only need 10-30K in savings to be that safety net- meaning you would not have to sell investments just after a crash.

I consider that level of savings to be easily achievable, and my Inlaws managed it and more on one lowish income by living within their means. Now way were they "bl--dy rich"

zygurat789

atush wrote: »

What figures are we talking about here?



Say you are expecting income of 15K per year, incl SP. So are taking 10K from a DD pot? So you'd only need 10-30K in savings to be that safety net- meaning you would not have to sell investments just after a crash.

I consider that level of savings to be easily achievable, and my Inlaws managed it and more on one lowish income by living within their means. Now way were they "bl--dy rich"

So having scrimped and saved £200,000 for a DD pot to generate £10,000 of income you need another (up to) £30,000 to insure the DD pot. I was under the impression that people had enough trouble just saving a pension pot let alone another 15%. Unless of course they are bl--dy rich

jamesd

Yes, the income from the investments only, not all income. One year provides protection for ten years of ten percent income drop from investments, more protects for longer or greater drops. It's a balance to be struck by each individual. If they can easily handle a 10% drop or 20% drop in income they may well be happy with less.

At perhaps £190 a week for a full working life minimum wage employee, the state pensions are worth perhaps £330,000 (assuming 3% for inflation-linked annuity purchase). It takes a lot of money to generate an income and ten to thirty thousand is not a huge amount compared to just how much you need to accumulate to be able to take that sort of income. £10,000 of income from an inflation-linked annuity at 3% rate would require accumulating £333,000 in a pension pot. Can be done for less, with less safety, via income drawdown, but the cash component provides some of that protection again.

While it takes accumulating a lot, get started nice and early and the monthly cost to get there isn't huge. Though it's being made harder if the flat rate cut to pensions for employees announced in the Queen's Speech today happens.

Linton

zygurat789 wrote: »

So having scrimped and saved £200,000 for a DD pot to generate £10,000 of income you need another (up to) £30,000 to insure the DD pot. I was under the impression that people had enough trouble just saving a pension pot let alone another 15%. Unless of course they are bl--dy rich

People in that position should have £30K of the £200K in cash or safely close to cash - eg short duration gilts. With that sort of safety net you can afford to take higher risks and get a higher return from the remaining £170K

atush

zygurat789 wrote: »

So having scrimped and saved £200,000 for a DD pot to generate £10,000 of income you need another (up to) £30,000 to insure the DD pot. I was under the impression that people had enough trouble just saving a pension pot let alone another 15%. Unless of course they are bl--dy rich

Everyone (incl the bl--dy rich but the less well off too ) are always advised to have savings outside of a pension. Putting every penny into your pension is not advisable. You do need access to other savings for emergencies incl stock market crashes lol.

but hey, if you want an annuity go for it. I won't stop you.

Hardy7

Thank you to all for the above comments. The debate above has also been very informative and given me reason to look more closely at the options.

On balance I feel more comfortable with the DD than annuity. I took a look at the tables which jamesd linked to in an earlier post - I cannot include the link as New posters cannot insert links. But the post included example % paid according to age and resulting income per £1,000. Taking the 2.5% as an example:

2.5% 55:£44 57:£46 58:£47 60:£49 65:£56

So is it better to start taking the pension at 55 or 65?
Age 55: £44 income per year per £1,000 pension fund
Age 65: £56 income per year per £1,000 pension fund

I calculate that means if you take the full £44 per year starting at 55, then by age 65 you've had £440 (10 years x £44) income.
If you start age 65, you get £12 extra per year compared to starting to withdraw at 55. But it would take over 36 years (£440 / £12) to make up the £440 you missed out on by not taking the previous 10 years.

Am I right or have I overlooked something? If I am right, it makes sense to start withdrawing as soon as possible, even if only to reinvest the money somewhere else?