Annuity beats drawdown

sgx2000

Currently
with £120,000 DC pension pot

I can get £9207  -  Flat ,No TFLS, 10 year garranty Annuity (couple of medical conditions)

At 4% Drawdown I would be starting at £4800

I understand the differences between annuities and drawdown
And the pluses and minuses of each
And Inflation
And lack of pot to be inherited

 - But

That difference is HUGE

LHW99

Is the annuity index linked? If not it will buy less in 10 years, and a lot less in 20. Even with health conditions, unless they are life limiting, most people could expect to have 20 years after SPA Hopefully the drawdown fund would enable an increasing income (although not guaranteed).

dunstonh

I understand the differences between annuities and drawdown

Your post suggests you don't.  Not yet anyway....

I can get £9207  -  Flat ,No TFLS, 10 year garranty Annuity (couple of medical conditions)

Ok, that is a 7.6725% annuity rate.

If you drew 7.8% using drawdown, is that higher than the annuity or lower?

That difference is HUGE

That is because you are comparing a fixed figure you have no say in (annuity) vs a variable figure that you decide on and in this case, you have plucked 4% out of the air to use as a comparison.  What if you picked 6% or 8% or 10% etc?

sgx2000

Thanks for the replies

The 4% is based upon the widely regarded safe withdrawl rule.... 
yes I know I can take whatever I want....

At 4.5% inflation the relative value of the £9200 will halve in 17 years

and the 4% £4800 withdrawl will increase by inflation proportionately 

I assume (have not done the calc yet) the crossover point is 12 or 13 years

But i could have the decreasing amounts between the 2 figures until the crossover.....
obviously knocking the crossover point back even further...

I really will have to do a spreadsheet.... lol

zagfles

The 4% supposed "safe withdrawal rate" is based on an INDEX LINKED income. You can only compare that with an index linked annuity. 

sgx2000

What is the uk average net return on a global equity fund ?

Yes I know... thats vague

Qyburn

A fair comparison would be inflation linked annuity with 100% spouse pension, no guarantee.  Even then you short change your heirs if you have any.

Wonder what the starting drawdown percentage would be if you wanted to only receive a fixed amount each year rather than increasing with inflation.

westv

Ignore the 4%.
RPI annuities with 100% spouse benefits and a reasonable drawdown rate are very similar. If you don't want to leave a legacy and you want to spend time on other things rather than investments, annuities are tempting.

sgx2000

Qyburn said:

Wonder what the starting drawdown percentage would be if you wanted to only receive a fixed amount each year rather than increasing with inflation.

Probably the 7.8% dunstonh mentioned earlier

dunstonh

it really boils down to a couple of things.

An annuity gives you certainty of amount.   Drawdown gives your flexibility that potentially allows you more but potentially could give you less.    You make the judgement call.

Audaxer

sgx2000 said:

At 4.5% inflation the relative value of the £9200 will halve in 17 years

and the 4% £4800 withdrawl will increase by inflation proportionately 

I assume (have not done the calc yet) the crossover point is 12 or 13 years

I think that would make the crossover point 17 years, as I calculate £4,800 increasing at 4.5% inflation pa would be worth an actual £9,707 after 17 years, whereas the annuity would still be giving you a fixed £9,200 pa. If you took the annuity but only need to spend £4,800 plus inflation each year, you could presumably save or invest the rest of the income until you need it after year 17 to boost your fixed annuity income. 

It does seem to me like a generous annuity rate, but not sure whether it is the best option if you don't need that much income to start with.