Makes you think

DavidLaGuardia

EdInvestor wrote: »

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).

It's not about the money not running out, its the fact that the income might have to be reduced at the five year point if the fund has significantly declined, even given the rise due to age (see my last point below below)

I agree there are many points that can make drawdown better value (certainly including inheritance before the age of 75), but I'm concentrating on risk to income here if high rates of withdrawal are taken

EdInvestor wrote: »

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.

There is still going to be a group of people with a mean life expectancy (albeit higher) whose death willb distributed tound the mean creating cross-subsidy.

EdInvestor wrote: »

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.

I agree with your assessment of someone not rising the income each year, but I was not assuming this pattern when examining mortailty drag.

A far better exaplantion than loss of cross-subsidy is the fact that at age 60 if someone has an estimated remaining life of X years, five years later their remaining life expectancy will not be X-5 years, it will be greater as the longer we live as adults the greater our expected age of death. In the same way extending a remaining term on a mortgage decreases payments (all other factors being the same) estending the point at which death is expected will lower the maximum income payment. Hence on needs to outperform gilts to compensate for this effect.

EdInvestor

IMHO the basic point here is that if you want a secure income from a pension fund but also want to keep the capital, then you should choose gilts and take a lower income than the maximum drawdon income allowed (and than the annuity rate).

To take the maximum income (which is after all 20% higher than the annuity rate) will require a certain amount of risk to be assumed, but this need not be higher than a "cautious" level if a low cost drawdown and investing style is employed.

To take the same amount as an annuity gives (but still keep the capital) requires a smaller amount of risk to be assumed.

Levels of income can of course be varied annually between the maximum allowable and nil.

Yer pays yer money....

Paul_Herring

Amazing how quickly the thread of this topic migrated from the Daily Mail's "Pensions Postcode Lottery" story...

purch

............even Hargreaves Landsdown think annuities are 'good value'

http://www.h-l.co.uk/news_and_expert_views/expert_views/articles/942.hl?rq=article

P.S. Considering the article in question was published in the Daily Mail :A which is never ever :rotfl: a source of inaccuarate or sensationalist stories on pension matters I am amazed no one is commenting on it...................:eek:

EdInvestor

Bizarre: how can you argue that annuities are good value on the grounds we are living longer without mentioning the effect of inflation on the purchasing power of the annuity income?

Annuities not only require you to relinquish your capital, but also guarantee your money will be worth half as much in 20 years' time.

This might be acceptable if the starting income was at a fairly high level,but it isn't.They are a recipe for decline into poverty in very old age. They should only be considered by people who are already pretty old or have serious health issues which will give them a much higher income - and even then, if they feel they will die young, they should also consider drawdown as it is often much better for the spouse.

dunstonh

Bizarre: how can you argue that annuities are good value on the grounds we are living longer without mentioning the effect of inflation on the purchasing power of the annuity income?

Annuities not only require you to relinquish your capital, but also guarantee your money will be worth half as much in 20 years' time.

Why would an index linked annuity lose purchasing power?

EdInvestor

dunstonh wrote: »

Why would an index linked annuity lose purchasing power?

It wouldn't but hardly anyone buys them because the starting income is so much lower than the level rate.So it's hardly a factor.

Andy_L

EdInvestor wrote: »

It wouldn't but hardly anyone buys them because the starting income is so much lower than the level rate.So it's hardly a factor.

Have you got a source for that or is it just a gut feeling?

EdInvestor

I have seen the figures but can't remember where.The numbers are very small - it takes you 17 years to make up the loss, so it's hardly surprising.

Clearways

Ding Ding round 3... In the Blue Corner Ed... Theeee... Investoooor
In the Red corner Dunston eeeeehhhhhcccchhhh