Drawdown or Annuity

xylophone

Have you checked your state pension situation? https://www.gov.uk/check-state-pension

OldMusicGuy

I just did exactly what you are planning. I have a large DC pot and I used half of it to buy an annuity at age 65. I had not planned on buying an annuity until age 75 at the earliest but with annuity rates so good I felt it was a great time to buy. I also found that one of the annuity providers was offering very good terms and came in significantly higher than the others (and higher than the generally quoted rates in the online annuity sites).

I am very risk averse so this enables me to provide a good level of inflation linked income (with 50% spouse benefit). It's easy to do, your IFA or intermediary will arrange this. My DC pot was uncrystallized and half of it was used to buy the annuity. No tax, no hassle.

This really suits my appetitie for risk. I can happily leave the remainder invested (at a higher equity percentage than the whole DC pot was invested at) and not worry about it as with SP, savings and the annuity all my needs are covered for 10 to 20 years at least.

As my pot was uncrystallized, I had the option to take 25% tax free cash (for the part of the pot used to buy the annuity) at the same time as buying the annuity but you don't have to take it.

I got my quotes at the end of December and rates have dropped a bit now so they aren't as good as they were. But if you get actual quotes you may be pleasantly surprised (like I was).

zagfles

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.

That isn't "risk"! That's like arguing that buying any sort of insurance is a "risk" because there's a good chance you'll never have to claim on it!

I'm not sure why people keep conflating what is most likely to give you the highest lifetime return with risk. Any type of annuity will likely give you less over your lifetime than drawdown invested in equities. If you want the greatest chance of maximising your lifetime income, you'd use drawdown invested in equities. You wouldn't use an annuity. Everyone understands that average equity returns are better than average gilt returns over the long term. The point of an annuity isn't to try to maximise lifetime returns. So comparing annuities with drawdown in terms of lifetime income is pointless. That's not why people choose annuities over drawdown.

Why, then, do people, including some advisers, always do exactly that when comparing level and index linked annuities? The reason to choose index linked over level is exactly the same as choosing annuity over drawdown. It's not "what will maximise my lifetime income". It's "what will give me a safe, guaranteed income for life".

zagfles

https://forums.moneysavingexpert.com/discussion/comment/80027311#Comment_80027311

We're looking at similar, we have a few small DB pensions which plus the state pension doesn't quite provide the income we want in retirement, so intend to buy an index linked annuity to make it up. Then can leave the rest invested and drawdown as we want, knowing it doesn't matter if it runs out (as long as it lasts at least until SPA)

michaels

https://forums.moneysavingexpert.com/discussion/comment/80027311#Comment_80027311

How did your annuity rate compare to the 'swr' on the same money? I suspect they wer enot too far apart - this differential is the price being paid for certainty.

OldMusicGuy

https://forums.moneysavingexpert.com/discussion/comment/80027512#Comment_80027512

It was over 4% (even with spousal protection) which I thought was pretty good. But one of the quotes was way ahead of the others.

Malthusian

That isn't "risk"! That's like arguing that buying any sort of insurance is a "risk" because there's a good chance you'll never have to claim on it!

Shortfall risk is a risk too. The potential to be significantly worse off in the first couple of decades of your retirement over fears that "my annuity might be worthless in my 80s / 90s" is a risk. The contrary risk might not happen, or you might not be around to see it, or if you do see it your needs might have reduced due to reducing activity.

If you had no use whatsoever for the extra income that a level annuity would bring (and it would simply sit in your bank account, which may or may not be enough to cover future costs of living increases) then there is an argument for using that bit of the pension pot to buy inflation-proofing. But very few people who buy annuities are in that situation.

zagfles

Malthusian said:

That isn't "risk"! That's like arguing that buying any sort of insurance is a "risk" because there's a good chance you'll never have to claim on it!

Shortfall risk is a risk too. The potential to be significantly worse off in the first couple of decades of your retirement over fears that "my annuity might be worthless in my 80s / 90s" is a risk. The contrary risk might not happen, or you might not be around to see it, or if you do see it your needs might have reduced due to reducing activity.

If you had no use whatsoever for the extra income that a level annuity would bring (and it would simply sit in your bank account, which may or may not be enough to cover future costs of living increases) then there is an argument for using that bit of the pension pot to buy inflation-proofing. But very few people who buy annuities are in that situation.

That's not "shortfall risk"! Shortfall risk is the risk of being short of what you wanted/needed/expected. If you buy an index linked annuity you know exactly what you're getting. If that's short of what you wanted, then that's not risk, it's a known fact. And then you might need to consider taking an actual risk, eg using drawdown or a level annuity, where your real terms income in future years is unknown.

It's a fairly silly argument to suggest not taking a risk is actually a risk because you risk being worse off than if you took that risk! Using that logic I took a "shortfall risk" by not betting on the Grand National and I'm now worse off than those who backed the winner!

Also you seem to be assuming that the annuity will be your main/only income, rather than providing a core which you can supplement with possibly riskier investments. I can understand the logic of front loading your retirement spend, but doing it using a level annuity is a very clumsy and risky way of achieving that. IMO better to work out what core income you need to supplement state pension & and DB pensions, buy that using an index linked annuity, then use the rest to drawdown for the early retirement spend, as you have more freedom to take risk because your core income needs are covered.

ukdw

Before going too far down the partial annuity purchase process it's worth checking that your current pension provider allows partial transfers out for annuity purchase.

I signed up for a partial annuity at a very good rate at the end of last year, however I ended up losing the deal because my pension provider refused despite quite a lot of pressure from my advisor to allow a partial transfer out.

dunstonh

You are not allowed to do partial transfers on crystallised funds UNLESS it is for a partial annuity purchase or pension sharing order.     A provider that doesnt allow partial transfers at all won't help but most modern platforms based plans should.