Drawdown

Sunrise27

We have a few years left until we retire but are starting to think more about our pension pots
i used an online calculator to give us a rough idea how much our ‘pots ‘ will be worth when it’s time to retire but there is a noticeable difference in the amount you get per year if you drawdown your pension is that right ? ( I realise there’s more risk involved ) 

gm0

This is a huge topic. 

You can find annuity best buy tables.  Which tell you an annual income per 10k or 100k of pot.
With joint life for couples and no index (a flat rate) or some level of inflation rises e.g. 3% each year.  And impaired life rates for those already sick or of short life expectancy (higher).

It is a simple calculation to turn that "income" value into a percentage of the pot used to buy it when you take out the annuity. 
There is no outliving your pension with an annuity.  But whenever you die post an initial guarantee period (available on some products) the capital is entirely gone when you (or both of you) die.  And the income can often change e.g. 50% first death and then ceases at 2nd death modelled on how many salary based pensions work with spouses

Meanwhile back over over in the Pensions freedoms (Drawdown) world. Your pot stays invested. 

You take an amount from the pot - say 3% - 3.5% of the pot each year.  And uprate your income as you go - say at 3% as before.  The pot declines but is topped up by investment returns - and swings around wildly due to market volatility during the 30-40 years. 

A plausible comparison rate for a couple pooling their pensions in retirement would be joint life, 100% spouse income, 3% indexed.

You keep doing this extract income thing for 30-40 years.  Investment returns do what they do in the order they do them (which sadly matters way more as a retiree than when you were saving up). 

Whatever is left (if any) is yours to pass on as you didn't pool your pension with anyone else to cover for an early or a late death. 
So you can run out (by drawing too much and outliving it to 110) or may instead pass on a large pot to children or other heirs

You are now completely responsible to manage your own investments and the sequence of them.  What gets sold and when to drop out the income. You didn't play death pool betting with the life company and their actuarial tables.

The bonus of this task that you actually get to see is the (slightly) higher than annuity rate income as % of pot.  (If investment returns co-operate - viewed over the long term).  The bigger bonus your heirs could see is the possibility of inherited pension capital should you not draw it all - either because you underestimated income / were lucky with the period and sequence of returns or you died earlier than expected during the drawdown

The criticial issue with all drawdown planning is managing withdrawal so that the plan does not fail when you are extremely old and going back to work is less helpful as a contingency. This bias tends to lead to conservative choices that "leave a pot" a lot of the time.  Not everyone. At every start date.  But a lot of the time.

Some people also convert part of their drawdown pot to an annuity - but later on in retirement (not 50s-60s) once the rates are better.

This is all very personal to circumstances, SP entitlements, couple/single, other final/average salary pensions arriving which provide another source of guaranteed income. 

What works for one with drawdown would be foolish and reckless for another.  Hence this guidance is drawn in the broadest of brush strokes.

Good place to come looking for help understanding DIY and advised drawdown.  Welcome

Notepad_Phil

What annuity type are you comparing against?

I think you're likely comparing drawdown against a level annuity on possibly a single life basis with no guaranteed pay out period.

Comparing drawdown against an annuity with any inflationary protection is likely to paint a different picture unless you're considering retiring in your seventies. It will be even more different if you want to take the annuity on a joint life basis. And then even more different if you want the annuity to have any guarantees on the minimum term it will pay out for.

I've been early retired for 5 years now and there's no way that I could have retired at 55 using annuities (either at todays or then rates)  - but that's not to say that I won't ever take out an annuity as it is something that can start to make very good sense at the right age.