Opening a second pension - one for annuity, one for drawdown

lucyandthomas

Hi All

Long time fan of MSE but this is my first forum post so please go easy on me! I’m 48 and self-employed, 20% tax payer. I’ve had a stakeholder pension with Standard Life for 20 years (230k) invested in a lifestyle profile. Charges are 0.8%. I’ve taken no interest in this at all until recently (stupid I know), but I’m trying to make up for it now.

I’ve been looking at the Vanguard SIPP and like the sound of the life strategy 60 (potentially life strategy 80) fund. Charges are considerable lower than 0.8%. I’m wondering about keeping my SL stakeholder going for now (better the devil you know mentality) but putting all contributions into a vanguard SIPP from now on. So, I’d have two pensions, with a view to using one to buy an annuity and one for drawdown. 

Thinking I could use my SL pension as 25% lump sum and annuity in about 10 years time (am I right that managed lifestyle funds are better if you want an annuity?), and then using the Vanguard funds for drawdown at a later date when needed. 

I would still be contributing to Vanguard SIPP after taking lump sum from SL stakeholder.

My husband has a few old pensions which need sorting out too, but that’s an issue for another day!

Any thoughts gratefully received - thanks in advance 

Albermarle

You seem to be on the right track. You have £230K in a pension at age 48 - could be worse !
0.8% is not dramatically high , although you can get cheaper as you have discovered . However investment performance is more important than charges ( within reason ) .
Also there is nothing special about Vanguard Life Strategy funds , they are simply low cost multi asset funds and there are other similar ones , some would say better ones.
Fund-of-funds: the rivals - Monevator

dunstonh

I’ve had a stakeholder pension with Standard Life for 20 years (230k) invested in a lifestyle profile. Charges are 0.8%. I’ve taken no interest in this at all until recently (stupid I know), but I’m trying to make up for it now.

Stakeholder pensions were great in 2001 but by 2005, they were second best to personal pensions if you had over £20k or thereabouts.   Not bad. Just better existed after that point.

I’m wondering about keeping my SL stakeholder going for now (better the devil you know mentality) but putting all contributions into a vanguard SIPP from now on. So, I’d have two pensions, with a view to using one to buy an annuity and one for drawdown. 

Why do you think you need two pensions to do that?

(am I right that managed lifestyle funds are better if you want an annuity?), 

if you are a lazy investor then yes. If you are not then no.

lucyandthomas

Thanks both. I am a lazy investor - actually, it’s more to do with not really knowing what I’m doing, and not being very trusting in terms of getting financial advice.

in terms of having two pensions so I can use one for an annuity and one for drawdown, I thought it would be sensible to keep the one intended for an annuity in the managed lifestyle fund, moving towards ‘safer’ investments as I near retirement, but keeping the one intended for drawdown in a more equity-based plan so it can (hopefully) grow more. With approx 10 years until I buy an annuity, I’d rather have potential for more growth with some of my money. If it is all in the managed lifestyle fund, there will presumably be less potential for the chunk I want to use for drawdown to grow as much over the next 10 years?

Really appreciate your replies

Albermarle

When put that your strategy makes sense . When planning to buy an annuity , it is better to start to derisk a few years out and right down to cash for the last year or so. Presumably the lifestyle plan will do this for you but I would check the details carefully.
For drawdown , you can almost just stick with the same investments before and after drawdown , although some mild derisking as you get older is normal anyway ( although some will stick with 100% equities until they die )

dunstonh

in terms of having two pensions so I can use one for an annuity and one for drawdown, I thought it would be sensible to keep the one intended for an annuity in the managed lifestyle fund, moving towards ‘safer’ investments as I near retirement, but keeping the one intended for drawdown in a more equity-based plan so it can (hopefully) grow more. With approx 10 years until I buy an annuity, I’d rather have potential for more growth with some of my money. If it is all in the managed lifestyle fund, there will presumably be less potential for the chunk I want to use for drawdown to grow as much over the next 10 years?

There is no need to separate pensions like that.  You can achieve it within a single pension.

and not being very trusting in terms of getting financial advice.

But it has also cost you as the product you are in could have been improved upon 15 years ago.    The choice should be to either DIY or use an IFA.   Never use an FA.   If you are going to DIY then you need to actually do the work yourself.   Closing your eyes to it and hoping for the best is unlikely to give you the best outcome.   

jamesd

Lifestyling tends to serial too early so better to combine them. Once you get say five years out you could move some money or some more money into bonds. The Lifestrategy fund will already have a lot of bonds so you could do something like switching 80% from Lifestrategy 60 to 80 and putting the 20% into a global bond fund to segregate it without changing the overall risk.

At the moment I see a quote of 1.8% of the amount spent for an annuity that increases by RPI inflation each year, starting at 55 or 2.1% at 60.

This compares pretty poorly to safe withdrawal rates using income drawdown, Two examples being:

3.7% before costs, increasing with inflation each year on a 30 year plan. This starts out assuming that you'll live through a repeat of the worst sequence in the last hundred plus years and you'll usually be able to increase it. It's common called the 4% rule because that's the US number, formally it's called constant inflation-adjusted income.

5.5% initially before costs normally increasing with inflation using the Guyton-Klinger rules in a 40 year plan. These rules are as safe as the other one but start at closer to average times and skip inflation increases or take bigger cuts or extra increases depending on the times you live through. It's that flexibility which allows the higher start.

Annuities typically start to look like a good deal around ages 75-85. A far cheaper way to get extra guaranteed income is to defer claiming your state pension. That adds 5.8% per year, way better than annuity rates.