Annuity or Drawdown

philip1988

I would appreciate any thoughts on whether I should purchase an annuity or place my pension pot into drawdown.


A little about myself. Male aged 64 currently in receipt of a teachers' pension since the age of 60. My wife is also retired and together we have a comfortable life style on our respective pensions/savings. Both my parents are alive and in their late 80's


I have an additional pension which is currently worth approx £60K. Next year when 65 I was planning in taking the 25% TFLS to help out our daughter and then placing the remaining approx £45k either into drawdown or purchase an annuity. I am well aware that annuities are in freefall and are likely to be worth even less in a year's time.


Because I have type 2 diabetes (very well controlled) mild asthma and an underactive thyroid (thanks mum) I qualify for an enhanced annuity. As something to compare with I did a search on the internet today and got a quote of £187 a month. Level payment, no increases etc. At that rate it would take just over 20 years to return my investment.



I am fairly risk adverse but on the other hand concerned at how much annuities have fallen in recent years. So my questions are:


a. Whether with a relatively small pot which would be better off in drawdown or annuity
b. For this size of pot should would it still be preferable to see an IFA (not a lot of experience in investing though have a year to learn)
c. If I went down the IFA route are they likely to be able to find me a better deal (having taken their fees into account) than going it alone


Thank you in advance for any guidance which would be extremely helpful

robin61

I think it could depend on whether you need more guaranteed income or not. You have your teachers pension and also the state pension to come. Can you live off these ?

kidmugsy

Is the survivor of you both also likely to have a "comfortable lifestyle"? If that is in doubt you might be better off using your TFLS and leaving the rest of the pension invested for the future.

dunstonh

I am fairly risk adverse but on the other hand concerned at how much annuities have fallen in recent years.

What risks are you averse to?

c. If I went down the IFA route are they likely to be able to find me a better deal (having taken their fees into account) than going it alone

For pots over £20k, an IFA is likely to be cheaper as the direct deals/internet take commission (which the IFA does not). Around £20k is where the fee becomes cheaper than the commission. Plus, there are some IFA only deals. The last two annuities I arranged this month had the intermediary only provider coming out top.

philip1988

Thank you for all your replies


Kidmugsy - certainly no real need for the extra income at the moment so keeping the pension invested until the need arises.


Dunstonh - I appreciate that all forms of savings/investments have risks associated with them. I suppose what I am saying is I worry at the thought of seeing the value of investments going down even though they normally return over time.


Good to know that using an IFA would be cheaper. Would that only be for annuities or investments as well

dunstonh

Dunstonh - I appreciate that all forms of savings/investments have risks associated with them. I suppose what I am saying is I worry at the thought of seeing the value of investments going down even though they normally return over time.

Other risks are:
1 - inflation risk - if the rate of return doesnt keep up with inflation
2 - shortfall risk - by not having enough (often by taking too low risk and the return not being high enough leading to ad hoc capital withdrawals which erode the value)

With income provision, there is no safe option on all fronts. Every option will suffer one or more of the risk areas. It is about taking sensible risks. You dont need to go gung ho but also being too low risk can be more damaging.

Good to know that using an IFA would be cheaper. Would that only be for annuities or investments as well

Annuities definitely. This is being looked into by the regulator as the DIY providers are still paid commission and the commission rates can often be 3% or more. That commission is factored into the annuity rate. So, £45k at 3% pays £1350 commission. However, an IFA on a fee of £1000 means that £350 less has been factored into the annuity rate. Plus, IFAs benefit from economies of scale pricing. They dominate the distribution. And some annuity providers will haggle their price with the IFA often leading to another 5% on the initial rate. Sometimes more.

Investments will depend on where you buy and what is used. DIY can be cheaper if you get it right. But more expensive if you get it wrong. IFA charging on investments can also vary significantly from good value to disgracefully high charges (that is like any job you ask someone else to do. There will always be good and bad value)

jamesd

philip1988 wrote: »

I have an additional pension which is currently worth approx £60K. Next year when 65 I was planning in taking the 25% TFLS to help out our daughter and then placing the remaining approx £45k either into drawdown or purchase an annuity.

For income the £187 a month you have been quoted on a pot size of £45,000 appears to be a level annuity, that is, no inflation-related increases, though that guess is clouded by it being enhanced. By way of contrast, a person who reaches their state pension age from April 2016 can get a 5.8% increase per year of deferring, inflation-linked with CPI for life. So initially it appears likely that a substantially higher guaranteed income could be obtained by using drawdown to provide income while deferring your state pension.

A person who reached their state pension age before 6 April 2016 gets a higher 10.4% increase per year of deferral and unlike the 5.8% rate this is mostly inheritable by a spouse.

While state pension deferral looks likely to be a good candidate for best provider of a guaranteed income for life, the biggest question is perhaps whether you have any need for that. Since money you spend on that or an annuity is gone, there is nothing left for such possible needs as care later in life or inheritance. For this sort of reason I suggest that perhaps your better choice might be drawdown even with no state pension buying, to preserve capital for possible need later in life.

So far as being comfortable with drawdown long term goes, you may find it useful to experiment with the cfiresim part of the topic Drawdown: Safe withdrawal rates. While it is true that investment returns are not guaranteed, there is a fair body of evidence suggesting that things are likely to go well if properly planned for.