Why not annuitise now?

dunstonh

Thrugelmir wrote: »

Drawdown is a fad. I waiting to see how long it is before the sob stories hit the media. Risk is such a badly understood concept.

They tend to arrive after every negative period on the stockmarket.

Typically, the people that suffer are those that took annuity style incomes (6-7% p.a.) and continue to do so through negative periods which pushes the effective withdrawal rate into double digits.

The default guarantee period seems to be 5 years. It is pretty cheap to increase this to 10 years.

The old 5 or 10 year guarantees were the two options allowed by legislation. That legislation was changed recently and now you have providers offering upto 30 years or more. Or value protect (e..g £100k of fund buys an annuity. Person dies after 40k has paid out under the annuity. So, 60k is returned as death benefit).

AnotherJoe

Genuine questions to try and understand why you guys think annuities are good / drawdown bad.

1. What protection do you have with annuities? Could an annuity provider go bust? If they do, what happens?

2. The OPs figures are around 4.5% right? With no inflation adjust.

On drawdown, in the long run, I'm essentially protected from inflation am I not, since the stock market "should" in the "long run" mirror inflation? And if I drew out say 5-6% a year then "on average" I'm decrementing my fund at 1-2% a year which should outlast me as long as I have a buffer in terms of cash so I dont need to draw out so much in bad years. And I will have several years buffer.

I've run firecalc on my numbers and I dont run out of money (indeed I end up generally with a large sum I can take to the grave with me or just spend more early on ) out of any of the past 110 years worth of stock market data, drawing 40k inflation adjusted over a period of 35 years from a 600k pot now.

That includes adding in 2 X SP 6 years in and one DC 7k at 5 years in, assuming i retire in 2 years time and put another 50k in the DC between now and then.

So with an annuity in 2 years time, I'd be looking at around 30k for 3 years then 51k (not counting tax) indefinitely, compared to an extra 10k a year on drawdown.

Of course there's a middle way which is take an annuity on a percentage half and drawdown the rest, maybe half and half.

P.s. If interest rates are going up over the next year or two, which is general wisdom, is that a reason for waiting ( for the OP? )

Linton

AnotherJoe wrote: »

Genuine questions to try and understand why you guys think annuities are good / drawdown bad.

1. What protection do you have with annuities? Could an annuity provider go bust? If they do, what happens?

2. The OPs figures are around 4.5% right? With no inflation adjust.

On drawdown, in the long run, I'm essentially protected from inflation am I not, since the stock market "should" in the "long run" mirror inflation? And if I drew out say 5-6% a year then "on average" I'm decrementing my fund at 1-2% a year which should outlast me as long as I have a buffer in terms of cash so I dont need to draw out so much in bad years. And I will have several years buffer.

I've run firecalc on my numbers and I dont run out of money (indeed I end up generally with a large sum I can take to the grave with me or just spend more early on ) out of any of the past 110 years worth of stock market data, drawing 40k inflation adjusted over a period of 35 years from a 600k pot now.

That includes adding in 2 X SP 6 years in and one DC 7k at 5 years in, assuming i retire in 2 years time and put another 50k in the DC between now and then.

So with an annuity in 2 years time, I'd be looking at around 30k for 3 years then 51k (not counting tax) indefinitely, compared to an extra 10k a year on drawdown.

Of course there's a middle way which is take an annuity on a percentage half and drawdown the rest, maybe half and half.

P.s. If interest rates are going up over the next year or two, which is general wisdom, is that a reason for waiting ( for the OP? )

1) Annuities in payment are 100% protected by FSCS.

2) I dont understand your drawdown numbers. Crudely taking £40K inflation adjusted from a £600K pot over 35 years fails in 64% of cases according to Firecalc. Adding in the extra incomes presumably means you arent taking £40K from £600K. You mention 5-6%. Taking £30K from a £600K pot fails in 40% of cases - fancy taking the risk?

Its not the average that messes things up, its taking too much from the pot when prices are low. If you are completely dependent on your pension pot + SP is "should" mirror inflation "in the long run" good enough? Are you confident that the average joe would have the understanding of when to drawdown his income and when to raid the cash buffer?

So yes, drawdown can be good when you have the knowledge and slack to adjust the amount drawn down and the investment knowledge to manage the pot. Having sufficient annuities to meet your needs and drawdown to raise this to your wants is a sensible compromise - that's what I do. I doubt most people can meet these criteria.

AnotherJoe

2) I dont understand your drawdown numbers. Crudely taking £40K inflation adjusted from a £600K pot over 35 years fails in 64% of cases according to Firecalc. Adding in the extra incomes presumably means you arent taking £40K from £600K. Y
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Because I didnt explain it well enough I guess. (and mostly because I messed up, read on)
DC is 600k now, might be 650k in 2 years (adding in 25k/year until 2018)
Yes I'd be taking 40k from 650k (which is aprox 6%)

... unless me telling Firecalc I want 40k a year means its dropping the drawdown to 19k a year after I start taking the 21k ? ... hmm I think it does. So that will be why I have lots left over I'm mostly taking 19k a year rather than getting a pay rise when the SP and DB kicks in.

This is why I'm asking the questions now and not 5 minutes before I retire :-)

I would not though, be reliant on the DC. I will have several years income in cash as a buffer.

I"m unsure about inflation adjustment. Seems to me once you get to half way in your spending will reduce unless you go into care in which case inflation wont cut it anyway. My plan for that involves Beachy Head

dunstonh

Annuity largely removes risk as you get the annuity for life and get 100% FSCS protection. Its just inflation risk if you dont buy increasing annuities. Although for many people, have an annually increasing state pension and a level annuity is acceptable risk if they expect their spending to decline in retirement as they get older. If you retire early, then not factoring in inflation is dangerous. Or, if your spending habits are high then you will still need to cover inflation even if your spending will likely decline.

Yes I'd be taking 40k from 650k (which is aprox 6%)

Which means you would almost certainly be looking at capital erosion or be needing to have periods of reduced income or no income to compensate if the erosion is heavy for a period (such as during a typical crash).

westv

Annuity rates aren't exactly generous at the moment.

chucknorris

westv wrote: »

Annuity rates aren't exactly generous at the moment.

That's what I thought, I know my approach might be far too simplistic, but I thought drawing down would be better value. We don't have a problem with running out of money, in fact, we have the opposite problem, we'll probably die before it is all spent (we don't have children).

AnotherJoe

dunstonh wrote: »

Which means you would almost certainly be looking at capital erosion or be needing to have periods of reduced income or no income to compensate if the erosion is heavy for a period (such as during a typical crash).

You'd have periods of reduced or no income from your DC. Which isn't the same as periods of reduced or no income as long as you have a good buffer.

robin61

My wife has a DC pension and she will almost definitely not buy an annuity. We just can't get over what a small pension they buy compared with 10 or more years ago and hate the idea of some insurance company getting their hands on the money.
The plan is to try to maintain as much of the capital as we can and pass it onto our daughter eventually. I am thinking that the young generation will find it harder to get onto the property ladder and maybe to save for pensions. It's also inheritance tax friendly.
Mind you if we didn't have my DB pension and other investments to fall back on there is no way we would have been able to live with the risks . We intend to take 4% income per annum and maybe as others have said put a hold on even that if there is a severe downturn.

DaveMcG

An annuity in an insurance policy that aims to protect you against the risk of living so long that you run out of money.

The problem with taking out annuities when you are young is that the insurance company is going to assume that you will live a very long time and the point that you can benefit from the "living too long insurance" will be far in the future. In the meantime you have a rather poor income investment.

In comparison, with an older person or an impaired life, the assumption of expected life is shorter so outliving the insurance company's estimate although not more likely is at least an event that might occur in the next couple of decades rather than much longer. The income is also higher as the capital is being exhausted over a shorter period.