Annuity or drawdown

Prostang

Hi all I’m 61 year old and still work part-time , my  wife has no private pension and we have no dependants to leave the money to, I have a pension pot of £500k and we have over £500k in various savings accounts. 
what is the best option drawdown or annuity with 50% spouse option
thanks Steve 

af1963

Depends how much value you place on the certainly of a regular payment being guaranteed for life. 

Your required spending level, and both of your state pension entitlements, may also affect the choice, but it's really about the choice between leaving your pension invested, where the value will rise and fall depending on how it's invested, or locking in a specific annuity payment,

Linton

it depends on how much guaranteed income and your attitude to inflation. For example at 60 years old £500k could currently buy you about £32k/year fixed or perhaps £18k/year RPI linked both with 50% spouse pension after your death.

Is this sufficient to meet your needs? Have you got a better use for your money?

on the other hand with sensible investment management you could hope but not guarantee to sustainably draw down perhaps £22k/year for your entire life.

of course you can mix the options.

Given the amount of money lat stake I would suggest that you pay for advice from an IFA who would be able to take you in detail through the options and help you decide which is best given your circumstances and requirements.

Qyburn

Prostang said:

Hi all I’m 61 year old and still work part-time , my  wife has no private pension and we have no dependants to leave the money to, I have a pension pot of £500k and we have over £500k in various savings accounts. 
what is the best option drawdown or annuity with 50% spouse option
thanks Steve 

For comparison with drawdown, I would want 100% spouse option on the annuity. But it depends in what else she has, and whether that plus half the annuity would suffice.

Albermarle

 we have over £500k in various savings accounts. 

That is a lot to be holding in cash. Although with current interest rates, you can just about keep up with inflation going forward, the value of cash is eroded most years by inflation. You must have lost quite a lot of value in the last 18 months or so.
Over a long retirement the value of cash savings would be hurt pretty bad.
Maybe you need to see an IFA like already suggested.

Prostang

Thanks for the replies we both will receive full state pension, my problem is I have worked hard to get to this position and don’t like taking risks , we also are  not very extravagant and live on my £25k part time wage . 

The other problem is I went to a adviser’ (not IFA) and the initial 4 % charge put me off 

dunstonh

what is the best option drawdown or annuity with 50% spouse option

Why just those two options?

The other problem is I went to a adviser’ (not IFA) and the initial 4 % charge put me off 

Try an IFA.   Target fee around £2500-£5000

Qyburn

Prostang said:

Thanks for the replies we both will receive full state pension, my problem is I have worked hard to get to this position and don’t like taking risks , we also are  not very extravagant and live on my £25k part time wage.  

Two State Pensions will get you £21k (ish) of that. In your shoes and with those figures I'd be considering using part of your DC pot for an annunity, RPI linked, and 100% surviving spouse benefit. Remember if you die before her she loses your State Pension, so with only 50% spouse that would mean her living off half your previous joint income.

OldScientist

Prostang said:

Hi all I’m 61 year old and still work part-time , my  wife has no private pension and we have no dependants to leave the money to, I have a pension pot of £500k and we have over £500k in various savings accounts. 
what is the best option drawdown or annuity with 50% spouse option
thanks Steve 

The first thing to determine is how much your expenditure will be in retirement. If the figure you mention in one of your other posts above (i.e., about £25k per year) is roughly correct, then in the long term (i.e., once you both reach state pension age) then you'll need a £4-5k per year from your pensions/savings.

A joint RPI annuity with 100% spouse payments can be had with a payout rate of about 3.3% of premium (I've used moneyhelper, see https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/compare-annuities , and assumed annuitants of 61 and 60 in reasonable health). In other words, a premium of just over £150k will purchase the RPI protected income you need (in the event of one of you dying, the survivor would be left with a baseline income £10.5k+£5k=15.5k per year - you need to consider whether this will be enough. You might also need to add a bit more to the income to account for tax (although under current rules, this will be a small amount).

In order to survive the 7-8 years until state pension you'll either need to continue in your part time job or provide an inflation adjusted income of about £21k per year. Assuming, 8 years and a real return on your savings of -1%, then you'll need about £174k (this was calculated in a spreadsheet using 21/pmt(-1%,8,-100,0,1) )

This would leave about £350k in you pension pot and about £320k in your savings for ad-hoc spending over the next 35 years or so (assuming the ages of 61 and 60, the probability of one or other you reaching 100 is about 10%).

The alternative approach would be drawdown, assuming your pension pot is invested entirely in shares, then with a overall portfolio of 50% stocks and 50% cash, historically a 40 year drawdown would have supported roughly 2.9% inflation adjusted income (according to https://www.2020financial.co.uk/pension-drawdown-calculator/ ), i.e. the £820k you would have in your portfolio (without purchasing an annuity, but using some of the cash to replace the state pension) is likely to provide an inflation adjusted income of about £23k per year (the historical performance depends on a number of assumptions, but for the UK is considered to be between about 3.0 and 3.5% for 30 years, less for longer). If you are only looking to withdraw about £5k per year, then this is likely to be fairly bullet proof.

A lot of assumptions here - the first of which (i.e., your likely expenditure) is the critical one. A requirement for a larger spend will change all of the figures in the subsequent analysis and might change the conclusion.

Overall, given the expenditure assumption either plan is likely to work, but for someone risk averse (or who doesn't particularly want to manage their portfolio in retirement), the annuity option might be more straightforward.

Albermarle

Prostang said:

Thanks for the replies we both will receive full state pension, my problem is I have worked hard to get to this position and don’t like taking risks , we also are  not very extravagant and live on my £25k part time wage . 

The other problem is I went to a adviser’ (not IFA) and the initial 4 % charge put me off 

But in reality you are taking a risk, that the value of your cash savings will get eroded by inflation. In fact it is not a risk, more of a certainty.

SouthCoastBoy

Albermarle said:

Prostang said:

Thanks for the replies we both will receive full state pension, my problem is I have worked hard to get to this position and don’t like taking risks , we also are  not very extravagant and live on my £25k part time wage . 

The other problem is I went to a adviser’ (not IFA) and the initial 4 % charge put me off 

But in reality you are taking a risk, that the value of your cash savings will get eroded by inflation. In fact it is not a risk, more of a certainty.

I understand the statement regarding risk by holding cash, however I have a large cash holding and I would say generally I have been getting 1% to 2 % below inflation per annum as a return. Compounded over a number of years I can see that it would erode a lot of my cash in real terms, however I still feel comfortable with that, as I can't lose 50% overnight. The caveat to holding cash is that it is around 40% of my portfolio, the rest is invested in OEICs. I think it all depends on your mindset and what you feel comfortable with. Also when I do retire I will initially be using cash and not realise any value locked up in the funds I have invested in, over the last 30 years (both inside and outside my pension), so my cash value will slowly erode until I get to a lower cash percentage, which I have yet to decide what that should stabilise at, maybe 25 to 30%.

I'm saying this as I think the OP needs to make decisions that are comfortable for them, everyone is different. As said in previous posts, firstly work out your monthly income, identify how much capital expenditure you may need over the course of your retirement and go from there.

Unfortunately there is not a magic formula that can give you an answer, it is what you feel comfortable with and what is best for you, this is one of the challenges of a DC pension, with DB such issues don't arise, you get what you are given.