Annuity or...

jamesd

The method. Because income drawdown draws from a pot, when you die the pot is inherited and can provide a spouse with the same income. When they die too whatever is left can go to someone else.

3.2 is the highest level that would work in every case for the last hundred years in the UK if you take that from your starting capital and increase by inflation each year.

You'll find that inflation linked annuities pay around 1.7% to 2.1% depending on age.

JohnWinder

I don't think I can help you with understanding your pension review letter. Sorry.

Langtang said:

1. “We’ve adjusted your illustrations to take yearly inflation of 2.5% into account so you have an idea of how much retirement income you would get in today’s money”
2. “We’ve assumed the amount of retirement income you receive remains the same for the rest of your life”
3. “There are other options available to you if you were to take an annuity, such as inflation proofing your income.... or providing an income to a beneficiary if you were to die before them”

I’m not sure what 1 means, the 2nd one to me is saying the income will be the same every year, so not cpi indexed.

Perhaps 1. means: 'if you do not annuitise, and live off your investments (as they fluctuate at the whim of the markets) then you should expect to get £6380/year; and because you'll need to cope with inflation, our estimates allow for 2.5%/year inflation (not Venezuelan inflation) in raising that £6380 each year'.  My best guess.

Perhaps 2. means: 'you can't decide to double your spending after 10 years, or take any big lump sums out.'

Croeso69

JohnWinder said:

I don't think I can help you with understanding your pension review letter. Sorry.

Langtang said:

1. “We’ve adjusted your illustrations to take yearly inflation of 2.5% into account so you have an idea of how much retirement income you would get in today’s money”
2. “We’ve assumed the amount of retirement income you receive remains the same for the rest of your life”
3. “There are other options available to you if you were to take an annuity, such as inflation proofing your income.... or providing an income to a beneficiary if you were to die before them”

I’m not sure what 1 means, the 2nd one to me is saying the income will be the same every year, so not cpi indexed.

Perhaps 1. means: 'if you do not annuitise, and live off your investments (as they fluctuate at the whim of the markets) then you should expect to get £6380/year; and because you'll need to cope with inflation, our estimates allow for 2.5%/year inflation (not Venezuelan inflation) in raising that £6380 each year'.  My best guess.

Perhaps 2. means: 'you can't decide to double your spending after 10 years, or take any big lump sums out.'

I think point 1 is just showing what annuity you get in today's money. They have projected the fund at whatever growth rates deemed appropriate, calculated the (level) annuity at that point and then discounted the amount back at 2.5% per annum (inflation assumption) so it is expressed in today's money terms. eg £10,000 in 2040 would be 10,000 / 1.025^19 = £6,255 in today's money.

Point 2 just confirms that the annuity in point 1 is level, i.e. it is fixed for life and does not increase whilst in payment.

Point 3 says that other annuities are available, eg increasing with inflation, increasing at 3%, has a spouse pension etc. This would be your choice at the time you buy an annuity.

jamesd

So, here's another way drawdown beats annuity. You wrote that both SWR and annuity pay too little until state pension age.

With drawdown you handle it by multiplying your state pension by the number of years to go then using what remains as your initial SWR pot. Then immediately take as income both the state pension amount and the SWR amount as your annual income, because you've virtually set aside the money to pay the state pension bit until state pension age.

£154k - 9 * £9k = £73k remaining.
£73k * 0.32 = £2.34k

So ignoring the inheritance you might now start on 11.34k, increasing with inflation each year. You stop the £9k state pension substitute when you get the real one and continue with the £2.34k part.

Strictly, I haven't allowed for inflation on the assumed 9k state pension part of this. The way I did it is usually cautious enough to cover it.

You can do the same for your wife's state pension.

Thrugelmir

jamesd said:

3.2 is the highest level that would work in every case for the last hundred years in the UK if you take that from your starting capital and increase by inflation each year.

UK equities only or does that include bonds as well? 

jamesd

Equities and gilts. It also assumes 1.5% in total costs, deducting 0.5% from the cost-free 3.7%.

jaybeetoo

Have a look at https://www.pensionwise.gov.uk/en and book your free appointment.