Drawdown or Annuity

LadyWithBigGlasses

I took voluntary redundancy and early retirement in 2020 and moved my pension pot to a drawdown account after taking 25% tax free. The pot has grown a little in the meantime but seems to have plateaued over the last year. I’m wondering if it might be a good idea to use part of it (£300k) to buy an annuity. My first question is whether this is permissible. Am I able to move my money a second time? The second question is whether the £300k would be subject to tax if I take it out of the drawdown account to buy an annuity.

Albermarle

 The pot has grown a little in the meantime but seems to have plateaued over the last year

As the pot is invested in the financial markets ( presumably) it will go up and down from one year to the next. Normally though the long term trend is up and you will have most likely seen good growth in the years before 2020.

So if drawdown was the right decision in 2020, a flat spot/ decline in the markets should not really be a good reason to change, as it is entirely normal thing to happen over a 30 year drawdown period.

On the other side annuity rates have improved significantly since 2020.

If you want to purchase an annuity with part or all of it, you can. There will be no tax at the point of buying an annuity, but the income from it will be subject to income tax just like any other pension income. 

LadyWithBigGlasses

Thanks. I’m just trying to spread the risk and a guaranteed lifetime income from an annuity is appealing. Taking £300k out still leaves me with £300k left in the drawdown account and I also have other sources of income, I’m working part time and I own a rental house outright as well as shares and ISA’s.

it occurred to me that taking money out of the drawdown to buy an annuity was essentially the same as taking it as an income and would thus incur tax. Obviously money from the annuity will be subject to income tax as well.

LHW99

LadyWithBigGlasses said:

Thanks. I’m just trying to spread the risk and a guaranteed lifetime income from an annuity is appealing. Taking £300k out still leaves me with £300k left in the drawdown account and I also have other sources of income, I’m working part time and I own a rental house outright as well as shares and ISA’s.

it occurred to me that taking money out of the drawdown to buy an annuity was essentially the same as taking it as an income and would thus incur tax. Obviously money from the annuity will be subject to income tax as well.

I don't think you would actually  be personally "taking money out" to buy an annuity, otherwise you would run into tax implications. I have never undretaken the process, but my understanding is that its somewhat like transferring a SIPP or ISA. You contact an IFA (or go direct to a company that provides annuities, which may be more expensive) and they do the transfer straight from the pension itself.

LadyWithBigGlasses

Thanks! Hope you’re right

Linton

Yes, buying an annuity directly from your pension pot is standard usually after having taken the 25% tax free as a cash lump sum.  Paying for an annuity with taxed money results in a different product called a "purchased life annuity" with different tax treatment and a more limited choice of providers.

LadyWithBigGlasses

Tell me more…

zagfles

https://forums.moneysavingexpert.com/discussion/comment/80026562#Comment_80026562

Important to remember that an annuity is not really a "guaranteed lifetime income" unless it's index linked. Personally I think it's completely pointless buying a level annuity, or one which increases at a fixed %, because that defeats the whole point of an annuity ie a guaranteed income for life. You're just replacing investment risk with inflation risk. In 1970 a guaranteed income for life of £1000 would have been easily enough to live on, around the average wage at the time. 2 or 3 decades of retirement would have made it worthless. Drawdown (if it had existed then) would likely have been safer. Even now I have more faith in equities to maintain real value than the pound.

Malthusian

Important to remember that an annuity is not really a "guaranteed lifetime income" unless it's index linked. Personally I think it's completely pointless buying a level annuity, or one which increases at a fixed %, because that defeats the whole point of an annuity ie a guaranteed income for life. You're just replacing investment risk with inflation risk. 

If you buy an inflation-linked annuity you're replacing inflation risk with the risk that you don't live (and stay fit and active) until the very ripe age - typically 80s or 90s - when the extra income from the inflation-linked annuity finally makes up for all the income you gave up in the early years, thanks to the lower starting amount.

By this argument, an inflation-linked annuity is a big risk because you are likely to get less back in the long run than if you opt for fixed escalation at 10% per annum and then live for three decades plus.

In 1970 a guaranteed income for life of £1000 would have been easily enough to live on, around the average wage at the time. 2 or 3 decades of retirement would have made it worthless.

In the current environment, an RPI-linked annuity will give you just over half the starting income of a level annuity. (The assumption behind annuity pricing is that inflation will settle back down, otherwise inflation-linked annuities would be even lower than they are - the level-v-RPI differential has barely shifted in response to lockdown inflation.) What would that differential have been in 1970s? I'm not even sure if it's possible to guess, but we can assume it would be even wider as the insurer would be expecting inflation linked annuities to catch up more quickly.

People retiring in the 1970s also lived significantly less long than they did now. Far fewer people retiring in the 1970s lived to see the 90s and 00s.

So buying a level annuity in 1970 would not have been quite as crazy as it might seem with the benefit of several decades' worth of hindsight. Though in any case few people did as almost all pensions were defined beneft.

To buy an inflation-linked annuity in 2023 you have to be a) very sure that we're going back to 1970s / 80s levels of inflation and b) willing to lose a lot of money if you are wrong.

Mick70

does it also not boil down to how much security you crave ? stress free etc

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/80027181#Comment_80027181

This is very important for some people.

We often say that having a mix of guaranteed income and some pension invested/in drawdown is a sweet spot. So for the OP going 50:50 might be a good way forward, espacially as they seem to be getting a bit nervous about having it all invested after some market turmoil ( although this is par for the course with investing)