Asked to purchase an immediate annuity at age 55 but option 1 or option 2 ? Advise needed please !

Albermarle

Just to summarise the excellent replies from the other forum members, the 3% drawdown would not appeal to me even if it was available, as it would not fund the lifestyle that I want in my early retirement from aged 55 to 68 which is travel and maybe attending events

As I originally mentioned this 3 % figure, I would just like to expand on it a little.

With drawdown you can draw out at any % you like. However clearly if you draw out too much too quickly, it could well run out too soon. Also investment performance will play its part. So some statistical studies have come up with the concept of a  safe withdrawal rate based on historical statistics.

In reality there are various scenarios, such as.

1) Take a higher %, and then reduce it when State Pension kicks in for example

2) After 10 years you might well find the pot is bigger than when you started, so you can up the % ( if you want)

3) You might die with a pot three times bigger than when you started ( the safe withdrawal rate is largely based around worst case scenarios) and leave a big legacy.

Plus many other possibilities.

So the 3% + inflation, is really just a rate where even if markets are not very kind, there is only a small chance it will run out even if you live to a ripe old age ( in theory anyway)

Pat38493

I think the point is  that in most historical and Monte Carlo simulations, the safe withdrawal rates that you could have had, are only slightly lower than the usual annuity you could buy with the same money.  The reason the OP is finding different to this is probably because the annuities are not inflation linked, which will likely halve the spending power every 20 years or so (worse if inflation is high for a long time).  As Albermarle points out, there is probably a 90% chance you will end up better off by following a drawdown strategy because in around 90% of scenarios the overall income you can take out will be higher than what you got from the annuity (this could change a bit over time based on interest rates and yields etc but it’s roughly the case as far as I can tell).

So you are taking an income that will for sure reduce significantly and gradually during retirement, as opposed to an income that has a high chance of increasing during your retirement.

Also as said by several posters, don’t get hung up on 3% being the maximum withdrawal in the first years of your retirement - most people have a cash flow spending plan that could enable you to take out 6, 8, or 10% or whatever, in the first few years, if you then take your DB pension later on and take your SP into account as tell.

That’s I guess unless you have some kind of guaranteed annuity rates as part of the pension which are better than what the normal market provides.

Of course if it’s really correct that you are completely prohibited from transferring out this is moot, but even an IFA on this board seemed to be puzzled by that.

dunstonh

Of course if it’s really correct that you are completely prohibited from transferring out this is moot, but even an IFA on this board seemed to be puzzled by that.

Two IFAs.  HH is an IFA too.

s2020x

Thank you for your information Albermarle and the other kind members of the forum who have responded.

Just to follow through your suggestion, if I were to drawdown more at the start of retirement , e.g. £24,000 per year from the 450K pot over the first 13 years from age 55 to 68 to fund the lifestyle, then that would give a total of £2,730 per month with the db (similar to option2 of the annuity approach).

The state pension would then kick in at £1000 per month approx and the db is still there at £730 per month, totalling £1730 per month.

The question then is what the projected value of the pot is after these 13 years and how much could safely be drawn and for how long. Maybe under the scenario there would less likely be a legacy, unlike the joint annuity.

Pat38493

In the first post, you stated that the DB pension amounts you quoted were for taking the benefits at 55.  Presumably this also means that you would get a higher DB pension if taking it later on.  Your company appears to be saying that you can’t do that, but some posters here are suggesting you should investigate further.  

However, you have not said who your employer is, nor the exact pension provider or administators that your employer uses - this might shed further light as well.

What I would possibly suspect is that due to the way your pension is structured, you cannot get your hands on the DC amount without putting the DB amount into payment, and the rules state that you must take an annuity,  however this may not mean that you can’t immediately transfer the DC amount out instead of purchasing the annuity and Dunstonh seems to think he did a similar one recently.

Anyway, I guess that if we take that at face value you would have
From 55 to 67 - DB pension + higher withdrawals
67 onwards - Db + Sp + lower withdrawals.

This would need to be modelled in a spreadsheet or cash flow planning software based on your life expectancy assumptions and tested against historical and random market scenarios.   As has been pointed out you are comparing apples with pears when talking about minimum safe withdrawal rates which are assumed to be adjusted upward with inflation each year versus annuities with no indexation.  An IFA could model all this for you or you could do it yourself if you did some research on it.

s2020x

Yes, the drawdown was modelled on taking £2000 per month before the quotes and i would need to crystalize $46,000 each year to withdraw £24,000 making full use of the 25% tax free and the £12500 tax free allowance. That would last for approx 10 years until the uncrystalized fund was zero and the FAD fund was around £350,000. That would take me to age 65.

Then 65 to 67 would need to use maximum FAD leaving around £310,000.

Then the state pension kicked in reducing the FAD withdrawals to about £10,000 per year for 31 year apparently or to pass down. Comparing that to the annuity approach gives £3000 per month flat and 100% spouse. Swings and roundabouts.

Drawdown approach is definitely do-able but with a lower amount.

s2020x

that dollar sign above is a typo. :-(

Pat38493

s2020x said:

Yes, the drawdown was modelled on taking £2000 per month before the quotes and i would need to crystalize $46,000 each year to withdraw £24,000 making full use of the 25% tax free and the £12500 tax free allowance. That would last for approx 10 years until the uncrystalized fund was zero and the FAD fund was around £350,000. That would take me to age 65.

Then 65 to 67 would need to use maximum FAD leaving around £310,000.

Then the state pension kicked in reducing the FAD withdrawals to about £10,000 per year for 31 year apparently or to pass down. Comparing that to the annuity approach gives £3000 per month flat and 100% spouse. Swings and roundabouts.

Drawdown approach is definitely do-able but with a lower amount.

Remember that in the drawdown approach, the money you haven't extracted yet remains invested so the real amount will be higher than if you are just assuming that growth = inflation (which is effectively what you do if you just spread the current amount over the number of years).