Why I don't want to go with drawdown

choi

My pot is £250k
An IFA says he can put this into draw down
He says it could make 4% pa
Fees would be a total of 1.35% pa
I am very risk adverse

I cannot see that the proposed drawdown can consistently
make 5.35% going forwards

I would be concerned that the pot would get smaller
every year
I would also be concerned at the affect overtime of
inflation

This is why I favour the annuity option with RPI escalation

I can see the downsides
Less income per year
There could be nothing left after my wife and I die
But there is at least peace of mind which is priceless for me

bowlhead99

Though 1.35% a year sounds costly, the annuity is 'costing' the difference between everything that could be made and everything you contractually get.

If you don't need anything left after you die, nor a lump sum left in the pot for later-life care etc and you value certainty of income rather than the opportunity to maximise total income drawn, spending it all on an annuity is a good idea.

You could consider spending part of the money on a whole life or fixed term annuity and just part of the money as a drawdown pot. However, having smaller amounts being invested in the drawdown pot can make the cost per pound invested even higher in terms of what an IFA charges for his time and the platform or transaction costs of the drawdown product.

However, ultimately if you are 'very risk averse' (such that you wouldn't like the swings in value associated with a portfolio that delivers 5.35% plus inflation gross), and the income level from an inflation linked annuity is satisfactory, and you don't need any lump sums left over when you're in your last few years or on death; then your inflation linked annuity product will be fine. It's just less money than is potentially available if you were to embrace investment risk.

Which is the same as it was through the 'accumulation' phase of your £250k. Typically if you had embraced investment risk you could have worked for less time or with less effort to build the same size pot. Many people cannot bring themselves to do that because we are all wired differently and some are less willing to see losses or risk bad or difficult outcomes in pursuit of good ones.

Linton

An annuity can be fine for someone who is seriously risk averse. Peace of mind is more important than money. However have you got a quote for what I assume is a joint annuity? If you havent yet you may be very disappointed with the results. Would the annuity provide sufficient income for you to achieve your desired standard of living? If not the thought of perhaps 30 years living frugally could surely affect your peace of mind.



What makes you doubtful about the proposed investments achieving the necessary income? If you are basing your opinion on published real life investment returns you should bear in mind that such performance figures already include the fund management charges. These arent an extra bill you have to pay.


Your charges figure of 1.35% seems a little high: 0.5% for the advisor and say 0.25% for the platform would seem a very reasonable aim. Which leaves 0.8% for the fund manager which could be ignored, depending on how you have made your assessment.


If you need extra income there is no reason why you shouldnt split your pot with say 50% annuity and 50% drawdown to reduce the risk and possibly improve the return. Another aspect to consider is what your other income will be. If for example your needs are adequately covered by State Pensions and possibly some other employer pension income then taking risk with a drawdown should not be so much of a problem .

dunstonh

I am very risk adverse

What risks are you averse to? Investment risk is just one of the risks. Inflation risk and shortfall risk are others.

I cannot see that the proposed drawdown can consistently
make 5.35% going forwards

You wouldnt expect it to. It is a long term average that you aim for. Not a consistent rate. Even the bog standard middle of the road insurance company managed funds have managed in excess of 5.5% for the last 20 years (after charges)

This is why I favour the annuity option with RPI escalation

If that is what you want then that is what you can have. It may not be the best option financially but if you sleep better at night then fair enough.

Also, solutions do not have to be binary. You can have multiple options to make up a solution. it doesnt have to be all of one and none of the other.

But there is at least peace of mind which is priceless for me

So, why are you dithering? If this is the key need and the annuity is obvious to fit that, what is giving you second thoughts?

HappyHarry

choi wrote: »

My pot is £250k
An IFA says he can put this into draw down
He says it could make 4% pa
Fees would be a total of 1.35% pa
I am very risk adverse

I cannot see that the proposed drawdown can consistently
make 5.35% going forwards

I would be concerned that the pot would get smaller
every year
I would also be concerned at the affect overtime of
inflation

This is why I favour the annuity option with RPI escalation

I can see the downsides
Less income per year
There could be nothing left after my wife and I die
But there is at least peace of mind which is priceless for me

There's nothing wrong with taking an annuity on this basis. You're risk averse and want peace of mind, that's exactly the kind of client for whom an annuity is ideally suited.

From your previous post, you seem to be exploring the right kind of options.

Drawdown really is for those with an appetite for risk, and if that is not you, then don't do it. Find another IFA if needed (and do use an IFA, they will generally be able to source better annuity rates).

choi

Thanks for all comments so far
My reason for dithering is that I want to make sure I am making the correct decision

choi

HappyHarry wrote: »

There's nothing wrong with taking an annuity on this basis. You're risk averse and want peace of mind, that's exactly the kind of client for whom an annuity is ideally suited.

From your previous post, you seem to be exploring the right kind of options.

Drawdown really is for those with an appetite for risk, and if that is not you, then don't do it. Find another IFA if needed (and do use an IFA, they will generally be able to source better annuity rates).

Thanks
I will be using an IFA to set up the annuity
He is aware of my concerns about drawdown and understands fully my attitude to risk

Albermarle

Even the bog standard middle of the road insurance company managed funds have managed in excess of 5.5% for the last 20 years (after charges)

Dunston - in very approx. terms , how would you compare the middle of the road insurance company fund, with a typical multi asset fund of today . For example would it be similar to a 60% equities fund or a 40 % one in terms of risk/reward profile .
I presume charges would be lower on a more current fund ?

AnotherJoe

choi wrote: »

Thanks for all comments so far
My reason for dithering is that I want to make sure I am making the correct decision

"the correct decision" if by that you mean the most money, is unknowable, expect perhaps in retrospect when you die. Getting the highest level of income is statistically much more likely if you drawdown.
However if you are going to fret at every story about markets crashing over the next 30 years then an annuity is most likely the "correct decision" in terms of peace of mind.
Added to that, my recollection is that you have oodles of money in other sources, so its misleading (not deliberately I'm sure) to talk as if this is your one and only pension pot and choice.

As DunstonH has said theres no reason you cannot do a mixture of annuities and drawdown and asking people is this the right decsion is unknowable even for this one choice, let alone in the wider context of everything else you have.
Which to remind others is

• I have personal savings of £200 k
• There is a sum of £300 k in the business
• I have savings I am able to use for day to day living etc for the time being
• I also have a state pension
• My wife retires in six years time
• She will have a state pension plus a teachers part pension
• We own our own home outright
• We also own a separate home which gives us about £700 per month rent before taxation

... and you are considering a part time job just in case its not enough!!!

dunstonh

My reason for dithering is that I want to make sure I am making the correct decision

That is a good reason to "dither". However, some people end up being a position of continuous dither that ends up costing them money because they cannot make their mind up at all...ever.

I will say it again. You do not have to go 100% into one option. For example..... Work out your compulsory spending needs and then work out your guaranteed income (state pension and DB pensions incomes). Then take out the annuity to provide an income to cover the compulsory spendings. Then use drawdown to cover your discretionary spending. Your discretionary spending is likely to be fall as you get older. So, you wont need an index linked income for that segment.

If your fund is high enough to have a low sustainable draw rate, then the risks could be very low. For example, I am just doing one at the moment where the draw rate is 1.4% as no more than that is needed. It would be silly to buy an annuity on that one.

Dunston - in very approx. terms , how would you compare the middle of the road insurance company fund, with a typical multi asset fund of today . For example would it be similar to a 60% equities fund or a 40 % one in terms of risk/reward profile .

Most people, historically, ended up in what used to be called the balanced managed fund. That would be the 40-85% spread that you see today. A 60% equity fund would be a close enough match when looking at a modern low cost multi-asset style.

I presume charges would be lower on a more current fund ?

Not necessarily but in general yes. 1% around 2001. 0.5% around 2005. 0.28% last week (0.28% was platform and fund charge combined - in 2001-2005 they were bundled as single price on a traditional personal pension contract).

[Deleted User]

You wouldnt expect it to. It is a long term average that you aim for. Not a consistent rate. Even the bog standard middle of the road insurance company managed funds have managed in excess of 5.5% for the last 20 years (after charges)

That’s dangerous thinking AND a recency bias. High returns over the last 20 year period, if they suggest anything about the future, it’s that the expected returns will be lower.

Also, 20 year period is very short compared to how long newly retired people are expected to live.

In general, market returns have been good for a while but it rather depends where and when, which is important for an individual about to retire