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How down-drawers blow up
FatherAbraham
Posts: 1,024 Forumite
Those who opt for drawdown, rather than an annuity, often fall into a far worse financial situation, says the FT:
The analysis looked at how a 65-year-old who retired in 1999, 2004 or 2009 with a £50,000 fund would have fared had they chosen an annuity, or range of income drawdown options, from all equity to cautious.
The report, by Aviva, the pension provider, found the saver who opted to keep a fund invested in 1999 would be in a worse financial position 15 years later than if he or she had bought an annuity.
The drawdown investor, who would now be nearly 80, would only have enough left in the fund to purchase an annuity of £16 per month, compared with the £279 per month they could have secured in 1999.
http://cc.bingj.com/cache.aspx?q=Neither+an+annuitant+or+an+investor+be&d=27025887909970702&mkt=en-GB&setlang=en-GB&w=dcTYhXIdJsb5mT3cWiMgbOIWF2WjUo3j#axzz3EYfH0IhB
The analysis looked at how a 65-year-old who retired in 1999, 2004 or 2009 with a £50,000 fund would have fared had they chosen an annuity, or range of income drawdown options, from all equity to cautious.
The report, by Aviva, the pension provider, found the saver who opted to keep a fund invested in 1999 would be in a worse financial position 15 years later than if he or she had bought an annuity.
The drawdown investor, who would now be nearly 80, would only have enough left in the fund to purchase an annuity of £16 per month, compared with the £279 per month they could have secured in 1999.
http://cc.bingj.com/cache.aspx?q=Neither+an+annuitant+or+an+investor+be&d=27025887909970702&mkt=en-GB&setlang=en-GB&w=dcTYhXIdJsb5mT3cWiMgbOIWF2WjUo3j#axzz3EYfH0IhB
Thus the old Gentleman ended his Harangue. The People heard it, and approved the Doctrine, and immediately practised the Contrary, just as if it had been a common Sermon; for the Vendue opened ...
THE WAY TO WEALTH, Benjamin Franklin, 1758 AD
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Comments
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FatherAbraham wrote: »Those who opt for drawdown, rather than an annuity, often fall into a far worse financial situation, says the FT:
Actually it says that this happens "sometimes" rather than "often".
The main thing it says is that you can't predict the future.0 -
This has always the biggest risk with drawdown, which is why it is not suitable for everyone. Drawdown remains the higher risk approach to decumulation of pension funds because you risk outliving your capital, annuity rates further worsening etc.
You should only go for drawdown if you have a fairly high risk tolerance and you have the capacity to accept the risk of a worse off outcome.
Having said that, there are some good 'half way' products which offer the flexibility of drawdown and guarantees of an annuity.Stephen Covey once said that "when you teach once, you learn twice". That is the primary reason for my participation on the forums as an IFA.
Although I strive to provide accurate information in my posts, there may be the odd time when I fail. Yes I know it's hard to believe but even Your Hero can make mistakes. Apologies in advance.0 -
I don't think there are many years that would give the same result as 1999 so I think it's just a case of making up a story and then finding figures to support it.0
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Bear in mind that 1999 was stock market peak, the dom.com bubble was in full swing, so selling equities at that time and buying anything guaranteed fixed interest would have been a good move - purely down to market timing. Plus annuity rates were higher then.
I don't think you can possibly draw any conclusions from that as to what the best thing to do today would be.0 -
I don't think there are many years that would give the same result as 1999 so I think it's just a case of making up a story and then finding figures to support it.
Its not. There will be periods when buying a drawdown can end up resulting in a worse financial position. You hear stories all the time. From people drawing more than they should and depleting their fund or investing above their risk profile and not realising the volaility that will occur to those going into drawdown just before a market crash and the amount they are drawing no longer being viable and the fund now too small to recover and subject to erosion.
Annuity gives certainty of income for life. Drawdown could result in a greater amount but it could result in less. You wont know in advance which is best and a lot of it will be down to luck and timing. So, capacity for loss and an ability to understand are two important considerations when entering into drawdown.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0 -
Plus - if I understand correctly - it's comparing:
a) Someone taking an annuity at 65 with
b) Someone drawing down for a number of years from age 65, then buying an annuity
and comparing the annuity b) could buy with the annuity a) is getting.
It's blatently obvious that a) ought to give a higher annuity, everything else being equal, because of the mortality risk. Some people choosing a) will die before they get to stage b) got to.
Or have they accounted for this? It's a totally disingenuous comparison if they haven't.0 -
Bear in mind that 1999 was stock market peak, the dom.com bubble was in full swing, so selling equities at that time and buying anything guaranteed fixed interest would have been a good move - purely down to market timing. Plus annuity rates were higher then.
I don't think you can possibly draw any conclusions from that as to what the best thing to do today would be.
There isn't a "best thing to do today", only hindsight will tell. The article is merely highlighting the dangers of drawdown as we will be seeing a lot people opting for this method of withdrawal from next April. Drawdown can produce better results than an annuity purchase in the right conditions but it is not for everyone and there will still be many where an annuity is the better choice.Stephen Covey once said that "when you teach once, you learn twice". That is the primary reason for my participation on the forums as an IFA.
Although I strive to provide accurate information in my posts, there may be the odd time when I fail. Yes I know it's hard to believe but even Your Hero can make mistakes. Apologies in advance.0 -
A lot of people use it now. The only difference is that the limits are going. Anyone who draws down more than the current capped drawdown limit will clearly be in serious risk of running out of money. But the article doesn't concern them, it concerns people who draw down the sort of amount you can draw down now - ie annuity levels.There isn't a "best thing to do today", only hindsight will tell. The article is merely highlighting the dangers of drawdown as we will be seeing a lot people opting for this method of withdrawal from next April.
And hopefully there'll be other choices. Annuities basically insure against two risks - investment performance and living longer than average. If you want both those insurances, fine, buy an annuity. In the case of a 1999 retiree who lives till 2014, both those insurances paid out in spades.Drawdown can produce better results than an annuity purchase in the right conditions but it is not for everyone and there will still be many where an annuity is the better choice.
But some people may only want one eg insurance against longevity. I'd like to see products such as delayed annuities, where at (eg) 65 you can pay either a lump sum from your pension pot or a monthly premium, and if you live to (say) 85, it then pays a guaranteed amount for the rest of your life.
Then you get to purchase the annuity at 65, rather than at 85, which will obviously make it a lot cheaper, albeit it (like with any insurance) it may never pay out. You can then plan drawdown on the basis of 20 years rather than guessing how long you'll live.
BTW does such a product exist already?0 -
Majority of low-medium sized pots buy an annuity. From April, we'll also be seeing a lot of these using 'drawdown', due to the third withdrawal option of UFPLS (not technically drawdown as it is a straight withdrawal of funds and no fund is crystallised).A lot of people use it now. The only difference is that the limits are going.
There are products already where you can defer the annuity purchase, and benefit from deferred bonuses / guarantees such as lock-in growth/annuity rates. Or simply leave a portion of your funds invested and buy annuity at 85?But some people may only want one eg insurance against longevity. I'd like to see products such as delayed annuities, where at (eg) 65 you can pay either a lump sum from your pension pot or a monthly premium, and if you live to (say) 85, it then pays a guaranteed amount for the rest of your life.
Perhaps I misunderstood you but isn't buying an annuity cheaper at 85 when you are older and likely to have health issues?Then you get to purchase the annuity at 65, rather than at 85, which will obviously make it a lot cheaper, albeit it (like with any insurance) it may never pay out.Stephen Covey once said that "when you teach once, you learn twice". That is the primary reason for my participation on the forums as an IFA.
Although I strive to provide accurate information in my posts, there may be the odd time when I fail. Yes I know it's hard to believe but even Your Hero can make mistakes. Apologies in advance.0 -
Well, yes, but clearly any withdrawal of funds will reduce income from the fund whatever you eventually do with the remaining fund.Majority of low-medium sized pots buy an annuity. From April, we'll also be seeing a lot of these using 'drawdown', due to the third withdrawal option of UFPLS (not technically drawdown as it is a straight withdrawal of funds and no fund is crystallised).
Yes you've misunderstood. Reread my post. I'm talking about buying the "annuity" at age 65 but it pays nothing until age 85, when it then pays a guaranteed income for the rest of your life like an annuity.There are products already where you can defer the annuity purchase, and benefit from deferred bonuses / guarantees such as lock-in growth/annuity rates. Or simply leave a portion of your funds invested and buy annuity at 85?
Perhaps I misunderstood you but isn't buying an annuity cheaper at 85 when you are older and likely to have health issues?
This would obviously be cheaper than buying the annuity at 85 since there's the chance that you die between 65 and 85, and if so the "annuity" provider keeps the premium you paid. It's basically insurance against longevity.0
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