Makes you think

avantra

I read in the news today about the future planning of pension income and I am not sure if I get it correctly, living at a certain Postcode should make a difference to one's pension income??!! :mad: ( http://www.dailymail.co.uk/pages/live/articles/news/news.html?in_article_id=478873&in_page_id=1766&ito=1490)

EdInvestor

Annuities are such poor value anyway that better off people with bigger funds are tending to ignore them now - unless they have health issues and can get a higher rate.

dunstonh

Annuities are such poor value anyway

A guaranteed income for life that is higher than most savings accounts (obviously looking at 60+) is not necessarily poor value.

Those that are willing to keep investment risk may well be better with drawdown but a good many people dont want to risk their retirement income.

Jennifer_Jane

I have had income drawdown on a South African pension for some time now, mainly because the markets were doing well and I didn't need the money (on one account I lost a massive amount so I know about the risks). There's no way, however, as a single person, I would use my proper retirement money in such a risky way.

I think they have their place, of course, and a choice, but beware!

Jen

EdInvestor

Income drawdown is only as risky as what it's invested in.You can invest it 100% in gilts if you like - then it will be safer than an annuity

dunstonh

EdInvestor wrote: »

Income drawdown is only as risky as what it's invested in.You can invest it 100% in gilts if you like - then it will be safer than an annuity

Yield being enough to cover income and not suffer a capital loss?

DavidLaGuardia

EdInvestor wrote: »

Income drawdown is only as risky as what it's invested in.You can invest it 100% in gilts if you like - then it will be safer than an annuity

This is untrue if we take a like for like underlying growth rate from gilts. An annuity provides cross-subsidy. Hence if you live longer those that die in the early days subisidise you. A drawdown plan based on the same investments has no cross subsidy

EdInvestor

We are talking about risk.Investing in gilts in a drawdown plan is safer than buying an annuity from a life company - the lifeco is more likely to go bust than the Government.

You may get less income than with an annuity - though not that much less - but you don't lose the capital.

Income drawdown is just a tax wrapper - like a pension or an ISA.It's what you invest the money in that determines the risk level not the wrapper itself.

A conventional annuity is not an investment, it's an insurance policy.

dunstonh

You may get less income than with an annuity - though not that much less - but you don't lose the capital.

Please provide evidence that you dont lose money buying gilts.

If you buy at 120 and at age 75 the gilt is priced at 95 then you have lost capital. To do what you want to do would involve buying gilts already in issue and not holding on until redemption.

To get a high enough yield to make the income comparable to an annuity you are going to have to buy above 100. The minute you do that you are increasing the chance of capital loss (not that buying at under 100 means you are capital safe either).

the lifeco is more likely to go bust than the Government.

Neither is likely.

DavidLaGuardia

EdInvestor wrote: »

We are talking about risk.Investing in gilts in a drawdown plan is safer than buying an annuity from a life company - the lifeco is more likely to go bust than the Government.

The lack of cross-subsidy has EVERYTHING to do with risk.

For those with a longer life expectancy than average, a Drawdown must have the additional performance to offset the loss of cross subsidy. The additonal performance needed increases exponentially with age. This effect is called Mortality Drag

Don't get me wrong I believe the right investments can make this possible, but this is clearly not going to be the case if you use the same investments that are backing conventional annuities.

EdInvestor

I never said that a drawdown invested in gilts would pay the same amount as an annuity income while also providing a guarantee of not running out of money (though this wouldn't happen as there are safeguards in the drawdown rules to stop it).

After all, you are getting to keep the capital.There's no such thing as a free lunch.I would simply argue that people aren't getting enough of a return at present for giving up the capital and many feel the value of the annuity guarantee is negated by the effect of inflation in these days of longevity.

Also, IMHO people are judging drawdown risk in an inappropriate way.They take an individual's increasing age and compare the return of the drawdown each year required to match the annuity rate for the appropriate age. But this in not what happens in real life. Say a person goes into drawdown at age 60 and can withdraw an income of 8% (120% of annuity rate).Most people will leave the income level @ 8% for 5 years until the mandatory review.They wouldn't increase the amount annually - which is allowed and the older you get the higher your allowable income is - just as the older you get, the higher the annuity rate is.Because they are not locked into one rate when they retire, they can afford to be flexible.

You also have to consider the value of holding onto the capital for inheritance or a higher spouse pension rather than losing it as with an annuity.

And you have to consider the fact that the "cross subsidy" ( which of course is unquantifiable and may have only a marginal effect) is disappearing as more and more people are taking impaired life annuities.Now the lifecos are talking about "postcode" annuities, which will even further depress annuity rates for those in good health.

The most important risk factor with drawdown IMHO is the fees and charges, which can quite easily take as much as 4% a year - that's most of your natural income from dividends and interest, meaning you have pay income from capital.[Same problem arises with investment bonds, but worse as the depletion is institutionalised within the product and exacerbated by tax.]

But if you cut the charges out of the picture, drawdown suddenly becomes a lot less risky and can deliver the goods on quite a low-risk asset allocation.

I don't expect industry people to agree with this of course but the so-called "high risks" of drawdown are mainly caused by their own activities.