pros and cons of pension drawdown

chess_010

Hi I have an occupational pension that I contribute to and am thinking about what I should do when I retire in about 3 yrs time with the annuity generated.It is not a defined benefit scheme. What are the benefits of shopping around and gaining pension or am I better to consider a drawdown scheme. I believe there are potential higher benefits to be gained but at a higher investment risk.I do not in particular need to have a greater lump sum on starting this pension . any advice or help with regard to drawdown benefits would be of help to understand this area of pension planning and is there any new changes to these options

dunstonh

What are the benefits of shopping around and gaining pension

Either knowing that the scheme pension is higher or if the open market option is higher then you go with that.

or am I better to consider a drawdown scheme.

Depends on your investment experience, risks you are willing to take etc.

I believe there are potential higher benefits to be gained but at a higher investment risk

Correct. Risks that can result in drawdown requiring you to reduce your income in the future.

any advice or help with regard to drawdown benefits would be of help to understand this area of pension planning and is there any new changes to these options

The principle on drawdown is unchanged. The main changes are that the cap has been removed and that there are new annuity options (that bit gets virtually no media coverage)

jamesd

A key thing to consider is your age when you plan to retire. This is because assuming that you reach state pension age more than a year from now you'll be able to get 5.8% of a pot of money in an inflation-linked state pension increase by deferring claiming your state pension. This is close to twice as much inflation-protected guaranteed income as an annuity would provide.

Annuities start to become better value somewhere in the age range of 75-85. Under state pension age they tend not to offer good value for money compared to using income drawdown followed by deferring the state pension.

When it comes to defined contribution pensions like yours there is no need to buy an annuity and doing so will normally make you worse off than the alternatives. To give some idea, a common suggested value for a drawing rate is 4% of the initial pension pot size, increasing with inflation for life, without excessive chance of having to reduce income later in life. Doing this for a while then deferring the state pension can provide a good combination of higher initial income then some extra guaranteed income from how much you choose to defer with.

Because income will later be topped up by the state pension it's possible to start out drawing more than 4%, knowing that the extra drawing is temporary to replace the state pension income that you're not yet receiving.

To get started on the planning it's necessary to know things like:

1. Your age now.
2. Your age when you plan to retire.
3. Your state pension age and what your projected state pension income is.
4. Your minimum and desirable income levels.
5. What other savings and investments you have that could be used to produce income.
6. Any other pensions?
7. Same for any spouse you have.
8. Whether you own your own home.

With that sort of information it'll be possible to come up with a basic plan to meet your income needs both initially and longer term in retirement.

atush

As for the lump sum, with a DC pension you should take it. AS it is tax free.

If you dont need all the cash, then invest it using your S&S isa allowances as then it will have growth and income tax free. Income from your pension thru drawdown is taxable.

kidmugsy

As atush says, do take the lump sum because it is tax-free. If your instinct is to favour an annuity, consider this: with the TFLS (i.e. outside the pension) you could buy a Purchased Life Annuity, which is paid on tax-favoured terms, since HMRC views part of it as being just capital return rather than true income. With the security of the PLA behind you, you could then use the other 75% of your pension fund for income withdrawal. My guess, for what it is worth, is that in three years' time various providers will be offering "low risk" versions of drawdown, which might well appeal to you.