Pension at 55 or best to wait?

kidmugsy

The beauty of drawdown is that it can increase (per pound left in the fund) when interest rates go up. Whereas if he starts an annuity now he's locking in the current low interest rates. Unless he can expect an enhanced annuity for reasons of health it would be a rash gamble to start an annuity at 55.

tdowson

kidmugsy wrote: »

The beauty of drawdown is that it can increase (per pound left in the fund) when interest rates go up. Whereas if he starts an annuity now he's locking in the current low interest rates. Unless he can expect an enhanced annuity for reasons of health it would be a rash gamble to start an annuity at 55.

OK. I see that drawdown is probably better than a fixed annuity rate. So assuming drawdown, would the drawdown income be significantly better at 65 to make it worth not starting to draw at 55 assuming good health. If the pension was £100K, and at 55 he could take 4% p.a. drawdown (is that realistic?) that's £4,000 a year, over 10 years = £40,000 if interest rates were unchanged. If that £40,000 had not been drawn, would the drawdown starting at 65 be that much bigger as a % (e.g. 6%+) and is the other benefit the compounding effect that the 6% is on a bigger amount because £40K has not been withdrawn from the fund (e.g. 6% of £140K instead of £100K)?

Basically how should he work out the financial benefit of drawdown at 55 v 65?

GhIFA

Realistically, the only thing you can do is look at the present rates that would be given at ages 55 & 65 - there's no way of knowing what the actual rates will be in 10 years.

Presently taking the annuity at age 55 would give a rate of around 2.1% for index-linked income (no spouse's pension included). At age 65 it would around 3.2% on the same basis. (Without the index-linking the rates would be around 4.5% at 55 and 5.5% at age 65).

With Capped Drawdown, you would presently get a maximum income of around 5.16% at age 55 and 6.6% at age 65. Those levels of income would be reviewed every three years.

The rates will be higher for a 65 year old than a 55 year old whenever you compare them, however, there's no way of knowing if the rate for a 65 year old will be higher in 10 years time than that for a 55 year old today (Hope that makes sense!).

If there are any medical conditions involved then it is possible that they may qualify for an enhanced annuity which would give a higher rate than the standard market rates.

tdowson

GhIFA wrote: »

Realistically, the only thing you can do is look at the present rates that would be given at ages 55 & 65 - there's no way of knowing what the actual rates will be in 10 years.

Presently taking the annuity at age 55 would give a rate of around 2.1% for index-linked income (no spouse's pension included). At age 65 it would around 3.2% on the same basis. (Without the index-linking the rates would be around 4.5% at 55 and 5.5% at age 65).

With Capped Drawdown, you would presently get a maximum income of around 5.16% at age 55 and 6.6% at age 65. Those levels of income would be reviewed every three years.

The rates will be higher for a 65 year old than a 55 year old whenever you compare them, however, there's no way of knowing if the rate for a 65 year old will be higher in 10 years time than that for a 55 year old today (Hope that makes sense!).

If there are any medical conditions involved then it is possible that they may qualify for an enhanced annuity which would give a higher rate than the standard market rates.

This is really useful information. Thank you.

Annuity looks really poor 2.1% at 55 (3.2% is not much at 65 either!) Why would anyone go for an annuity? Is the annuity a fixed % of the fund at the start of the pension period, so whether the fund increases or goes down doesn't matter, you still get the same % of the starting value of your fund (possibly index linked) but no other growth or decline?

Capped draw-down looks better 5.16% at age 55 and 6.6% at age 65. I assume capped means the maximum allowed - so if you can manage on less then you can choose to take less and leave more in? If so how does that work? Do you tell the fund manager to just give you 3% and leave the rest in the fund? Is the value of the fund fixed at the start of the pension period like with annuity or does the pensioner see a difference if the fund goes down in value (stock market crash) then does it mean you can draw up to the cap (e.g. 5.15%) of the reduced fund size, and if the fund grows you can draw up to the cap of the bigger fund?

GhIFA

Annuity looks really poor 2.1% at 55 (3.2% is not much at 65 either!) Why would anyone go for an annuity?

These are the rates for index-linked annuities. They are expensive (hence the difference between these and the level income rates at the same ages. Some people prefer the certainty of knowing what they're income is going to be, and the basis it will be paid on. Drawdown offers higher income, more flexibility, but increased risk.

Is the annuity a fixed % of the fund at the start of the pension period, so whether the fund increases or goes down doesn't matter, you still get the same % of the starting value of your fund (possibly index linked) but no other growth or decline?

Once you have purchased the annuity there is no fund, so the scenario you have outlined wouldn't apply. You use the fund to purchase the annuity, exchanging it for the income you will receive for the rest of your life.

Capped draw-down looks better 5.16% at age 55 and 6.6% at age 65. I assume capped means the maximum allowed - so if you can manage on less then you can choose to take less and leave more in? If so how does that work? Do you tell the
fund manager to just give you 3% and leave the rest in the fund? Is the value of the fund fixed at the start of the pension period like with annuity or does the pensioner see a difference if the fund goes down in value (stock market crash) then does it mean you can draw up to the cap (e.g. 5.15%) of the reduced fund size, and if the fund grows you can draw up to the cap of the bigger fund?

Yes, with Capped Drawdown you are restricted to a maximum level of income, calculated according the prevailing rates set by the Government Actuarial Department (GAD). This is based on the fund value at the point of calculation. This will initially be the fund value at the point you enter drawdown. The maximum level of income must be reviewed on a 3 yearly basis (every third anniversary of entering drawdown - although some providers will allow you to do this at an earlier anniversary if requested). At these reviews the maximum level of income is reset based on the fund value at the point and the prevailing GAD rate for your age at the time. You can choose how much income you take each year up to the relevant maximum. The fund remains invested so is subject to the performance of the underlying investments held.

This carries more risk than an annuity as you do not have the certainty of being able to draw the same level of income for the rest of your life - whilst the GAD rates used to calculate the maximum will increase with age, if the amount you are drawing in income is consistently greater than the returns being achieved by the investments then your income is likely to fall at the next triennial review.

tdowson

GhIFA wrote: »

These are the rates for index-linked annuities. They are expensive (hence the difference between these and the level income rates at the same ages. Some people prefer the certainty of knowing what they're income is going to be, and the basis it will be paid on. Drawdown offers higher income, more flexibility, but increased risk.



Once you have purchased the annuity there is no fund, so the scenario you have outlined wouldn't apply. You use the fund to purchase the annuity, exchanging it for the income you will receive for the rest of your life.



Yes, with Capped Drawdown you are restricted to a maximum level of income, calculated according the prevailing rates set by the Government Actuarial Department (GAD). This is based on the fund value at the point of calculation. This will initially be the fund value at the point you enter drawdown. The maximum level of income must be reviewed on a 3 yearly basis (every third anniversary of entering drawdown - although some providers will allow you to do this at an earlier anniversary if requested). At these reviews the maximum level of income is reset based on the fund value at the point and the prevailing GAD rate for your age at the time. You can choose how much income you take each year up to the relevant maximum. The fund remains invested so is subject to the performance of the underlying investments held.

This carries more risk than an annuity as you do not have the certainty of being able to draw the same level of income for the rest of your life - whilst the GAD rates used to calculate the maximum will increase with age, if the amount you are drawing in income is consistently greater than the returns being achieved by the investments then your income is likely to fall at the next triennial review.

The expertise on this forum is impressive. Thank you.

OK so to be sure I have got it.

Annuity, can be fixed or index linked, but is otherwise consistent. There is no fund so stock market performance does not matter. The only threat is inflation, which is mostly alleviated with the index linked option. But the price for this is a lower % of the initial fund value.

Draw Down. This will cap the % of the fund value, but this % is revised every 3 years. The fund can go up or down according to stock markets. The % cap may be revised up or down according to the increase or decline in fund. The fund size will decline in every year that the overall performance (growth) of the fund fails to match or improve on the amount being withdrawn. So if the cap were 5.5%, then the fund needs to grow by at least 5.5% each year to maintain this cap at the next review.

Assuming you cannot pay any more contributions into the fund after you start either an annuity or a drawdown, then the starting size of the fund looks to be key to the timing. Is the fund size at the start point it more critical for an annuity than a draw down, or same for both? i.e. if your fund is worth £100K, and you are in the middle of what appears to be a strong bull market, it may be worth holding off a couple of years to start with a bigger pot? There is always risk of a downturn, but is timing the fund size as important as timing of the pensioners age?

atush

Draw Down. This will cap the % of the fund value, but this % is revised every 3 years. The fund can go up or down according to stock markets. The % cap may be revised up or down according to the increase or decline in fund. The fund size will decline in every year that the overall performance (growth) of the fund fails to match or improve on the amount being withdrawn. So if the cap were 5.5%, then the fund needs to grow by at least 5.5% each year to maintain this cap at the next review.

Plus, the rate of DD paid can be altered byt the GAD rate either going up or down- seperately to the fund size.

Is the fund size at the start point it more critical for an annuity than a draw down, or same for both?

The fund size is most important with an annuity as you Buy the annuity with the fund.

The initial fund size Does set the initial DD figure, but this can change.

GhIFA

tdowson wrote: »

The fund can go up or down according to stock markets. The % cap may be revised up or down according to the increase or decline in fund.

Just to clarify, the fund value plays no part in the calculation of the maximum income RATE - this is determined by the GAD rate. That rate is then applied to whatever the fund value is at the point of recalculation.

As you get older the GAD rate should increase, but if the fund value falls the income could still be lower than the previous review despite the higher rate used.