Flexible Drawdown or Annuity

tony4147

I've got 15 years to go and I'm trying to see what the various options are when I come to retire. I'm hoping to have a pension income of between £15/20K / yr and no doubt change rules will change before I retire.

If I take an annuity and say it is arranged only for myself (no spouse/dependents) then when I die so does my annuity and the pension provider gets to keep whatever is left in the pot, this could be a considerable sum if it was early into my retirement.

My understanding to qualify for flexible drawdown you must have "pension in payments from other sources of £20K in the year you take the drawdown", and I believe I can withdraw everything if I so wished.

I don't fully understand the flexible drawdown but it does appeal to me to make sure that the pension provider doesn't make any more money out of me, as far as I'm concerned they have had enough in the years I made my contributions.

So in year 1 of retirement would the 25% lump some count as pension from other sources under the rules?

Linton

The 25% lump sum isnt a "pension in payment". However State Pension is, which helps.

You misunderstand what happens to the money in an annuity if you die early. The pension provider doesnt keep it for their bonuses and Xmas parties. It goes to subsidise the 50% of people who die late. If you go for drawdown you dont have this insurance so you need to ensure that you have the money and investment skills to provide an income for as long as you may need it, and you may need it for a long time beyond average life expectancy.

tony4147

Linton wrote: »

The 25% lump sum isnt a "pension in payment". However State Pension is, which helps.

You misunderstand what happens to the money in an annuity if you die early. The pension provider doesnt keep it for their bonuses and Xmas parties. It goes to subsidise the 50% of people who die late. If you go for drawdown you dont have this insurance so you need to ensure that you have the money and investment skills to provide an income for as long as you may need it, and you may need it for a long time beyond average life expectancy.

So if a person were to get a pvt pension of £12.5K and the state is near enough £7.5K then a person could go the flexible drawdown route?

I do know that if a person dies it doesn't go on xmas parties etc , but I'm not convinced it goes on the 50% that live longer.

Annuities at 65 are about £4K (with 3% escalation) on a £100K pot, so pension companies are expecting people to live about 25 years when they retire at 65, but don't forget the pension company has the pot for investing over those years, and yes I know the pension Company takes the risk as the annuity is guaranteed for the retiree, but with rates so poor I think other options should be considered, and I saw flexible drawdown.

saintalan

tony4147 wrote: »

So if a person were to get a pvt pension of £12.5K and the state is near enough £7.5K then a person could go the flexible drawdown route?...

Yes that could apply to any remaining pension pots you have available.

Remember also that the income from Flex DD is subject to tax, so you would want to make sure any one year did not push you into HRT.

Cheers

Alan

GhIFA

You can use flexible drawdown as long as you have at least £20k pa in secured pension - such as annuity, scheme pension, occupational pension and state pension. Flexible Drawdown can be used for any fund remaining once this minimum income requirement has been met. Tax Free Cash does not count towards the income for this purpose.

Proxy

tony4147 wrote: »

I do know that if a person dies it doesn't go on xmas parties etc , but I'm not convinced it goes on the 50% that live longer.

.

Of course they're making some kind of profit. They wouldn't bother otherwise. But there is a huge risk of longevity against a company which is much larger than you might think.

Besides, you can always take a 10 year guarantee which at the age of 60/65 doesn't cost much. After all you're likely to live to late 80's. look at cohort mortality tables if you don't agree.

jamesd

Yes, you can buy an annuity to use flexible drawdown but do also consider capped drawdown. While the amounts you can draw start out fairly low they rise to almost 20% of the pot a year at older ages.

Given current annuity rates it's entirely possible that by buying an annuity you'd actually end up with lower income than if you just went with capped drawdown. Of course you won't get current annuity rates. Whether longevity and an end to fiscal easing and regulatory changes will make them higher or lower is unknown. What is known is that the death cross-subsidy doesn't start to make annuities good value for those in normal health until sometime after age 75, perhaps more like 80+ these days. So if you can handle the income variability of not using an annuity there is merit in delaying purchase until that sort of age, or in doing gradual purchases every year or two to gradually fix the income level. Because the annuities will pay out more, that also makes it cheaper to get to the flexible drawdown threshold.

However, to some extent this is moot. You have fifteen years to go so you can plan to have money in ISA investments as well as in pension investments, so you can arrange to have an income that's sufficient using that combination even if the capped drawdown rate starts of lower than you would like.

quotememiserable

tony4147 wrote: »

I do know that if a person dies it doesn't go on xmas parties etc , but I'm not convinced it goes on the 50% that live longer.

Annuities are based on average life expectancies. 50% of people live shorter than average and 50% live longer. So of course the money goes to pay those who live longer. The annuity is a gaurantee, they can't choose not to pay it.

saintalan

jamesd wrote: »

Yes, you can buy an annuity to use flexible drawdown but do also consider capped drawdown. ...

Hi James

Once you have the £20k available is their actually any advantage in Capped over Flexible?

Cheers

Alan

mania112

Let's not forget the OP is 15 years away from making a decision and a lot can change between now and then.

jamesd

Once you start flexible drawdown neither you nor anyone else can make any payments into any pension in your name without significant penalties.

With capped drawdown you can do things like taking pension income from age 55 and recycling that into more pension contributions to get a second chunk of tax relief on the money.