Fixed Term Annuity verses Drawdown?

martin2014

I have decided to stop work at age 59.
Am looking to fund this until I reach 67 (full state pension) by taking part of my pension.
I have approx £425,000 across multiple pensions accrued over my working life.
I want to achieve an annual income of around £26,000 - £28,000 for the next 8 years.
I am looking at taking approx £240,000 of pension in a fixed term annuity that will give me want I want.
Have been quoted income I need with a 16%+ growth for the 8 years (25% cash taken from this)
This will leave £185,000 invested in my other pensions to continue to grow until I am 67.
I am happy with this as this gives me income I want now and for the next 8 years and I will have over £200,000 in pensions (hopefully higher) as well as the state pension available.
My question is regarding drawdown of the £240,000. While the fixed term annuity gives me a guaranteed income for the 8 years if I were to place the £180,000 into a drawdown plan (£60,000 cash taken out) and assuming a standard growth rate would I be able to pull the £26/28,000 out for the full 8 years or would this run out prior to the 8 years or would using drawdown leave any money left to reinvest with my remaining pensions.
Would be interested to know what you think?

Albermarle

 if I were to place the £180,000 into a drawdown plan (£60,000 cash taken out) and assuming a standard growth rate would I be able to pull the £26/28,000 out for the full 8 years or would this run out prior to the 8 years or would using drawdown leave any money left to reinvest with my remaining pensions.

You can not assume a 'standard growth rate' ( whatever that maybe) over a relatively short period like 8 years. Nobody can give you an answer to your question ( in bold) 

Also you have the danger of sequence of returns risk. In simple terms if your investments go down in the first part of the 8 years, you then have a difficult uphill  battle, because you have had to cash in more investments to reach your £25Kpa. If you investments go down towards the end of the 8 year period, it is less of an issue.

As a secondary point, how will you take account of inflation over the 8 years ( whether via an annuity or drawdown) ?

£25K pa in 8 years will not buy you what £25K does today. Not even close.

dunstonh

Sequencing risk can be mitigated to some extent by bucketing/cashfloat.   Now that interest rates are a bit higher, that actually helps.  e.g. first 3 years keep in cash in the pension.   next 5 years hold in a short-term portfolio..  i..e a portfolio with investments weighted to reflect the short term nature.  Then adjust through rebalancing as the term gets less.

Sequencing risk is easier to mitigate than it used to be thanks to increased flexibility and higher interest rates.   However, investments will not give you the certainty of the fixed term annuity.   However, the investments can lead to a potentially better or worse outcome.   Which is best will depend on your overall savings & investments and your views on risk.

martin2014

Many thanks for the reply. That is what I anticipated regarding drawdown. Not sure I want to take the risk. Understand that Fixed term may not be the best option but it does seem to work for me.
Regarding inflation I will have remaining pensions in play as well as some investments. I have thought about cashing in one of the smaller pensions for a smaller fixed term nearer the time if needed to increase income.

OldScientist

The fixed term annuity is definitely a simple approach. However, as others have mentioned, inflation may be a problem. For example, if inflation drops from where we are now to 5% per year over the next 8 years, £25k would only be worth about £16.5k in real terms. Of course, if inflation drops lower than this then things will be better (e.g. 3% inflation would reduce your income to about 19.5k in real terms) but if we go off on a 1970/80s style inflationary period (i.e., it continues at 10%) then £25k might only be worth 11k in today's money. Does the income from the annuity you've been quoted include any beneficiary protection (if that is an issue). Does an inflation linked version of the fixed term annuity exist (the initial payout will be less)?

Historically in the UK, inflation protected drawdown starting at about £14k per year (8% of the 180k portfolio value) lasted 8 years (see https://www.2020financial.co.uk/pension-drawdown-calculator/ - I used 60% stocks, 20% bonds and 20% cash - although 100% cash gives a slightly better £15.6k).

So, one approach might be to go with the annuity as you planned and then top up the income from your remaining portfolio if necessary.

Albermarle

Just to add to the previous post, you can also buy annuities with a fixed increase each year ( 3% for example) regardless of actual inflation.