Alternative to an annuity?

Dronfieldman

I have a choice, as everyone has, of putting an entire sum of pension money into an annuity or taking 25% in cash and investing it in some other way. However, given that annuity rates are low and Building Society interest rates are also low, does anyone have any ideas of alternative ways of investing the 25% for income?

Drp8713

You could take income drawdown, that way you have an income, and the rest stays invested and carries on growing.


See: http://www.hl.co.uk/pensions/income-drawdown/how-does-it-work

magpiecottage

Drp8713 wrote: »

You could take income drawdown, that way you have an income, and the rest stays invested and carries on growing.


See: http://www.hl.co.uk/pensions/income-drawdown/how-does-it-work

This has risks. If you draw money faster than it grows the fund will become depleted and you could end up with too little.

There is also a concept known as mortality drag which basically means annuitants who die younger subsidise those who live longer.

You really need proper (independent) financial advice.

bigadaj

Dronfieldman wrote: »

I have a choice, as everyone has, of putting an entire sum of pension money into an annuity or taking 25% in cash and investing it in some other way. However, given that annuity rates are low and Building Society interest rates are also low, does anyone have any ideas of alternative ways of investing the 25% for income?

Most people take the 25% tax free, though were assuming this is a defined contribution pension, if it's defined benefit one then shout and there's a different answer.

The lump sum can be used to pay down debt, pay off a mortgage or be fed into isas for a tax free return.

The remaining sum needs to buy you a pension income, either by annuity or drawdown. Drawdown needs the sum to be managed by someone who decides investments and allocations, nothing too complicated but you need to understand the basics of investment.

Assuming were talking about capped drawdown the. There is a limit to what you can take out each year, so effectively like an annuity but with no guarantees. By taking investment risk you get a reasonable payout but you haven't given up the pot. If you die your spouse can continue to take money by drawdown and it can eventually be left to children with a tax charge.

If you give an idea of your age and age of retirement of different, eh size of your pension pot and some background in terms of what you want to generate per year, if you have other savings, investments and income the. Ore appropriate suggestions might be forthcoming.

atush

While DD ca have risks, it can also be les risky than assetd in cash in these times.

Also, the Pot in DD is limited by GAD rate (roughly equivalent to annuity rates) of approx 6%. These rates will be readjusted every 3 years to take ito act the size of the pot remaining, and the age of the recipient.

so this makes running out less likely.

mania112

atush wrote: »

so this makes running out less likely.

Less likely than an Annuity?!

Thrugelmir

My concern with the rush into drawdown is that future performance will result in lower income in years to come. As much depends on the performance of the investments. Suggested rate on drawdown is 4% in order to protect capital. Yet annuities pay a higher rate than this.

bigadaj

Thrugelmir wrote: »

My concern with the rush into drawdown is that future performance will result in lower income in years to come. As much depends on the performance of the investments. Suggested rate on drawdown is 4% in order to protect capital. Yet annuities pay a higher rate than this.

Possibly but that's a selective assessment.

If we use the oft quoted long term equity return of 4-5% in real terms then Theres a Decent chance of an increasing return through drawdown. You could argue that performance will be lower with conservative investments, at least in part, but it's still eminently possible.

Comparatively are you saying you can get 4% annuity return at a low starting age that increases with inflation and gives spousal benefits? If so great but for many the potential for inheritance will still push them towards drawdown.

Thrugelmir

People overlook events such as the impact of Deepwater Horizon on BP's share price and ability to pay dividends. Likewise holdings in high yielding safe shares such as banks. So decisions to secure an income for retirement along with investment choices need to made carefully. As there's no chance to replenish capital once it's lost.

bigadaj

Which is why diversification is key, chasing dividends is t necessarily wise it's maintaining total return.

There needs to ev liquidity within any plans, and cash reserves are important in riding the update nd downs of stock market returns but the restrictions imposed on annuities by the regulators, and also their love for large profits, means tahtvdrawdown is a credible alternative for many people.

FatherAbraham

Dronfieldman wrote: »

However, given that annuity rates are low and Building Society interest rates are also low, does anyone have any ideas of alternative ways of investing the 25% for income?

People have been claiming that annuity rates are "low" ever since annuities were first invented.

It's not that annuity rates are low. After all, they're set by market competition. It's that people vastly overestimate how much income their capital can safely provide.

There really is no free lunch.

Warmest regards,
FA