Dazzled and Confused

swithering

My husband and I are both 60 and have stopped earning.
My pension pot is £90k and hubby's is £64k (after our tax free lump sums have been taken.)
I tried using the drawdown calculator mentioned by Edinvestor and it throws up a warning that drawdown is usually not a good option for a pot < £100k. But the calculation still shows better income for drawdown than annuity. Why the warning?

EdInvestor

It's just to alert you to the fact that although you can take a higher income out of the fund, you might need to take risks in the investment of the money to make sure your fund was earning enough to pay out that higher income without getting depleted too rapidly.

This is not a problem if you have a large fund, or if you have other sources of guaranteed income (eg other pensions or property) which pay your basic costs.

The risk is also reduced if you can cut down the charges being extracted from your drawdown fund by using a low cost provider with no annual fee such as

https://www.sippdeal.co.uk
https://www.h-l.co.uk.

dunstonh

Drawdown is higher risk because the pot is left invested. Every 5 years your income taken has to be reviewed and if there is a drop in the fund value at that point, your income will be reduced. When you get to 75 and annuity purchase is required (likely if you dont have other income) then there is no guarantee that you will end up with an annuity income that is higher than what you would have had at 65. 60 is a tad young for annuity purchase. It starts getting more favourable at 65.

You could look to a lower risk investment spread but then you run the risk of the investments not being able to return enough to cover the income drawn. So, that is why it is classed as high risk.

If it pays off, you will do well. If it doesnt you will lose money. Can you afford the loss? if yes, then its worth considering. If no, then you need to strongly consider what you are doing.

It should be noted that the options Ed has posted are fairly low cost but not necssarily the cheapest. Also, the cost of advice can actually be quite low in these things using modern contracts. Its the older contracts mostly designed before "A" day where the costs are still higher.

swithering

dunstonh wrote: »

If it pays off, you will do well. If it doesnt you will lose money. Can you afford the loss? if yes, then its worth considering. If no, then you need to strongly consider what you are doing.

And I'm a 'tad young for an annuity'.
Feels like I'm between a rock and a hard place. Never expected this to be so difficult.
IFA here I come. Reading the threads, its obvious that this stuff isn't simple.
I know I can find an IFA easily - but how do I know if I've found a knowledgeable one?

dunstonh

I know I can find an IFA easily - but how do I know if I've found a knowledgeable one?

At the moment the term IFA covers a wide range of skills and ability from a basic general practitioner to those that specialise in different areas. You dont want to be seeing an IFA that spends 90% of their time doing mortgages. You want an investments/pension specialist.

Ask them what investment strategy they use. Any investment specialist will have a plan on how they invest and why. Ask them the typical number of funds they would normally recommend. Single fund solutions are old fashioned (except for smaller amounts). The bog standard cautious managed fund or balanced managed fund or distribution fund is lazy investing with larger amounts and a sign of either inability or no effort.

Ask to see research. Just ask questions. No decent adviser minds questions. Good advisers can answer them without needing to result to sales SPIN style responses. An adviser that basically says "this is best. Sign here" without saying why could have the best option but you need to be happy with what they are doing and whilst you may not understand all of it you should be able to tell from the responses if it sounds right.

There is also a general rule with financial services. If its not on paper it didn't happen. If you think something is too good to be true, get it on paper. If the adviser is evasive to that, then be on guard.

All that said, IFAs are the most reliable advisers out there. They have the lowest complaints ratio of all advisers. The problems historically come from salesforces and tied agents. So, avoid them and you rule out a lot of the problems.

EdInvestor

Just a few corrections

dunstonh wrote: »

Drawdown is higher risk because the pot is left invested.

An ordinary annuity will reduce in value due to inflation over the years.A drawdown fund has a good chance of increasing in value to cover inflation without the need to use high risk investments.

Every 5 years your income taken has to be reviewed and if there is a drop in the fund value at that point, your income will be reduced.

Not necessarily.The amount of income you can take from a drawdown fund depends on three things:

-the value of the fund
-your age
-your gender
-the 15 year gilt yield at the time the fund is valued.

Many people find that at the end of 5 years their allowable income goes up, not down

When you get to 75 and annuity purchase is required (likely if you dont have other income)

There is no requirement to buy an annuity at 75 - or at any age - anymore, regardless of how much income you have. [Can't you get a bit better informed dunstonh?This is elementary stuff... ]

then there is no guarantee that you will end up with an annuity income that is higher than what you would have had at 65.

Yes but so what, since you've had an income 20% higher every year since then?

60 is a tad young for annuity purchase.

Sure is

It should be noted that the options Ed has posted are fairly low cost but not necessarily the cheapest. Also, the cost of advice can actually be quite low in these things using modern contracts. Its the older contracts mostly designed before "A" day where the costs are still higher.

Note that most IFAs will want 3% of your fund just to organise the drawdown, which you could do yourself for a few hundred pounds.It's quite unnecessary to pay thousands.

dunstonh

Just a few corrections

An ordinary annuity will reduce in value due to inflation over the years.A drawdown fund has a good chance of increasing in value to cover inflation without the need to use high risk investments.

An ordinary annuity can be purchased with indexation. It may or may not be good value but that depends on your age. A level annuity will guarantee an income at that level for life. The income from drawdown can go down as well as up. Just ask anyone that had a GAD review in the years that followed the last stockmarket crash.

Not necessarily.The amount of income you can take from a drawdown fund depends on three things:

-the value of the fund
-your age
-your gender
-the 15 year gilt yield at the time the fund is valued.

Many people find that at the end of 5 years their allowable income goes up, not down

So, you are saying that income drawdown doesnt require the income to be reviewed every 5 years? I suggest you look up reference date and reference period.

Many people find their income goes down as well as up.

There is no requirement to buy an annuity at 75 - or at any age - anymore, regardless of how much income you have. [Can't you get a bit better informed dunstonh?This is elementary stuff... ]

I think it is clear from this and recent threads that you one of those types that knows a little and thinks they know a lot. You are a danger to other posters.

Whilst you dont have to purchase an annuity at 75, if you have limited or no other income, the penalty to not purchase the annuity could easily be too high to consider that an option. You could be stuck between a rock and a hard place. That is one of the risks.

Yes but so what, since you've had an income 20% higher every year since then?

Not guaranteed. Your may have taken 20% more but the investment may not have been able to sustain it and the value dropped. On 5 year review, the income may have to drop a lot to make that up.

Note that most IFAs will want 3% of your fund just to organise the drawdown, which you could do yourself for a few hundred pounds.It's quite unnecessary to pay thousands.

Any many IFAs do not charge 3%. 1% is quite possible. 1.8% more typical. 3% tends to be typical maximum. Some would consider that amount good value.

I'm sorry swithering that Ed is once again ignoring a number of the basic facts. I compare her very much to the old insurance salesman of years back who sold endowments. Endowments never lost money and always paid a surplus. The risk got forgotten over time and people got complacent. That is where Ed is now. She is no better than an endowment seller. Not only that, she is telling you to do it yourself using a route that gives you limited risk warnings and no FOS protection if you get it wrong. Please do not base your decision on her comments. Look at the balance and then make an informed choice.

Drawdown has advantages. However, it has risks. If you accept the risks and investment returns work in your favour, you will do well out of it. If the investment returns dont work in your favour then you could find yoru income reducing. If you dont want the investment risk or dont want your income at risk or a decrease then you should not consider it.

I dont think it can be much plainer than that.

jamesd

swithering, the warning is because it isn't risk-free. With a total pot between you of 154k that's sufficient to consider it. But dunstonh's cautions are real. You probably will do better provided you don't go directly to highest risk investments for most of the money. But you might not and the annuity rates are likely to fall over the years, since life expectancies are rising faster than expected and that hasn't yet been fully taken into account in the standard life expectancy tables.

How does your other pension income compare to what you need to live on as a basic minimum? If other pensions provide all you need for essentials then you're more free to take risks with this money.

One possibly interesting option would be to use drawdown until 65 then your husband purchases a level annuity. Then invest the difference between level and escalating annuity payments to provide the inflation protection and investment growth. This reduces the overall risk and also lets you build up an invested sum in a stocks and shares ISA that can be used for home modifications or health care later in life, without the restriction on how much you can draw at one time.

You're likely to get lower annuity rates than your husband and that makes it more likely to be better off to delay any annuity purchase longer in your case.

When using income drawdown it's also a useful approach to invest the difference between annuity and income drawdown, or part of it, in stocks and shares ISAs. This builds up a pot you can draw on as required for major unexpected events later in life and also reduces the risk because the money is still available, not yet spent. If all of it is more than desired, taking half of the extra income and investing the rest is one option.

swithering

I like the idea of starting with drawdown with the option for one or both of us to switch to annuity at 65.

dunstonh gave some sensible advice about checking that an IFA is a good one. I've been looking at the specialist companies (Annuity Bureau, wba, My Personal Finances) on the assumption that they should be the most knowledgeable. But do they tend to follow proscribed solutions? (Although that's not necessarily a bad thing - I don't expect our situation is unique.)

EdInvestor

So, you are saying that income drawdown doesnt require the income to be reviewed every 5 years?

No, I am saying that the value of the fund is only one thing that is taken into account at the 5 year review.

[URL="ttp://www.invidion.co.uk/pension_fund_withdrawal_calculator.php"]Drawdown calculator[/URL]

For instance with a pot of 90k and aged 60, the OP could currently take an income of 7128 a year.

If after 5 years, her pot value remained at 90k and gilt yields/interest rates remained the same, her maximum income would rise to 7,776.Even if the value of her pot declined to 83,000 she would still get a small "pay rise" to 7171 pa.

The likelihood of a big cut in income is pretty low.You could need to have incompetent investment of the fund plus a major market crash, combined with very low gilt yields/interest rates which would rarely occur together. On the other hand, over the last five years, some people will have doubled their pension income.

Income drawdown is the way most people manage their retirement income in most comparable countries like the US Australia and Canada.Only in the UK were annuities compulsory, elsewhere very few people buy them, for obvious reasons.
Why would you gamble all your capital on the date of your death? It's a crazy idea.

BTW note to the OP: How much are you two due to get in state pensions?

dunstonh

The last stockmarket crash showed losses on medium risk of upto 45%. Your example shows only a 7% loss. Why not show the figure if you had the 5 year review in 2002 to get an idea of what could have happened?

Why would you gamble all your capital on the date of your death? It's a crazy idea.

If it is your only source of income, why would you gamble your income on investment returns?