Annuities versus Drawdown versus both

Springfield1970

Hi all

I'm about 7 years away from needing to make a decision on what to do with my pension pot.
Considering the IHT rule changes I have been thinking a lot about how each scenario could play out, practically, financially but mostly psychologically.

I love the idea of being done with the whole thing by the time I'm 61/62. Pay mortgage off with TFLS, take an inflation linked annuity for £14k PA, no more SIPP investing, mortgage payments, insurance, WA taking .75%, no more watching the markets, and then being the bloody minded person I am, being determined to get way past the 15 year break even point. Just that would keep me going!

I'd keep working as I love my business and it keeps me sane. I'd only need to do a couple hundred hours a year. There's always a risk I'd lose my business and have a long wait until SP at 67 however. But my overheads would be covered at least.  I could find other work though.

I'm leaving my property to my son, he doesn't need my pension pot anyway. It's mine and I want to milk it.

However, Drawdown is also a nice idea. Control, a hobby, potentially bigger gains, but I can't help feeling that seeing it dwindle down would be like watching a ticking clock.  Also, I imagine Id be very anxious about the inevitable crashes, and I don't want to deal with that when I'm in my 70s 80s.  Also, I suspect I'd get 'One More Year' syndrome and get increasingly more anxious as the pot grew and of market crash fears.  I just don't want the stress.  I'm mostly in NA equities and world index, little bonds.  The growth has been massive the last few months, and I know what's coming.  Now it's bigger Im more preoccupied with it.  I am interested how gutted I'll be when it crashes.

Then of course there's the option of doing both.  

What are your thoughts/experiences with this?  I am aware that annuities haven't been optional for a while, but I think they are going to become popular and feasible again from 2027 (when the IHT law changes)

Bluebell1000

My situation is a little different; I have a DB pension but am planning to use my DC pot to bridge the gap between early retirement and when the DB pension kicks in. My thinking around it is that I'd rather have the known income from an annuity (though I'd be looking at a fixed term one), so I don't have to think about the drawdown / running out of money scenario. With drawdown, there's a chance I might end up with more money overall, but I'd rather have certainty

NoMore

For me having a mixture of both guaranteed income with some form of inflation proofing and drawdown, is probably the best strategy, you get the best of both worlds, with the security of the income to cover the bills no matter what and the flexibility of the drawdown to adjust your spending if required. The ratio between these two is probably a personal choice, having a lower risk tolerance will probably tilt you towards guaranteed income.

Springfield1970

NoMore said:

For me having a mixture of both guaranteed income with some form of inflation proofing and drawdown, is probably the best strategy, you get the best of both worlds, with the security of the income to cover the bills no matter what and the flexibility of the drawdown to adjust your spending if required. The ratio between these two is probably a personal choice, having a lower risk tolerance will probably tilt you towards guaranteed income.

Yes, there's a lot of room for creativity to suit the individual.  I didn't think about other ratios than 50/50.  Not sure about the TFLS splitting rules. Be great to keep that alive and growing!

Moonwolf

Like @Bluebell1000 my guaranteed income is DB and my bridge to 67 and fun money is drawdown from my DC.

This makes me very happy, that my core spending is covered, that if I lost it all I wouldn't have to worry where my next meal was coming from.  

This does mean I can leave all my investments in equities which is a wilder ride but with potential for higher growth.

I may well put some into and annuity if I am ahead around 70-75 although holding some back for an immediate needs annuity in case I need care might also be an option.

In your position (and this is just what I would do) I'd be writing a budget, bare minimum which is probably state pension only or bare minimum + which is the lowest standard of living you would really want.  Cover that with annuities and state pension then the rest can be drawn down for the extra whatever your go to luxuries are.

dunstonh

However, Drawdown is also a nice idea. Control, a hobby, potentially bigger gains, but I can't help feeling that seeing it dwindle down would be like watching a ticking clock.

hobby shouldn't come into it.  If you are investing correctly, it should be boring as hell.  If you are looking for it as a bit of excitement, then you are more likely to end up with a poorer outcome.

Statistically, in most periods, drawdown will beat annuity unless you are too heavy in low volatility investments.  In a small number of periods, an annuity will be better.          

A mixture of the two is viable.   This also includes the method of deciding how you would split equities and bonds.  e.g. 60/40 but rather than buying bonds, you use the 40% to buy an annuity and go 100% equities with the remainder.

Also, I imagine I'd be very anxious about the inevitable crashes, and I don't want to deal with that when I'm in my 70s or 80s.

You get one every 5-7 years, you have probably gone through many before.  So, why are they a concern now?
What did you do in the past when they happened?

 I'm mostly in NA equities and world index, little bonds.  

Which is at odds with what you describe about yourself.

 The growth has been massive the last few months, and I know what's coming.  

Not really.

if you look at a 100% equities portfolio over 20 years with 80% developed, 15% UK and 5% emerging (you would likely have less UK nowadays but we should not apply today's thinking to past thinking), you will see that there have been plenty of years where the returns have been similar or larger.   

Albermarle

Drawdown is also a nice idea. Control, a hobby, potentially bigger gains, but I can't help feeling that seeing it dwindle down would be like watching a ticking clock. 
Based on historical statistics, there is the concept of a Safe Withdrawal rate ( nothing is guaranteed but it is is a useful rule of thumb) 
The correct SWR ( typically 3.5% to 4%) should mean that the pot has only a 5% chance of running out before you are 95 ( or something along those lines) . It is quite possible you will die with substantially more than you started with.
So unless you were unlucky and markets were very poor for extended periods, it is unlikely you would see your pot dwindle away. The key is not to withdraw from it too quickly.

If you are interested there are two threads on this subject currently running ( listed very close to yours) 

tacpot12

I think you are right to consider the psychology of investing. You have some experience of this, and can see the downsides of having to manage your SIPP. But I think you also have to consider whether you will regret giving up the control you currently have.

I have my SIPP In drawdown, and am living off the natural yield of the portfolio, which is about 4.2% pa. The portofolio is increasing in value slowly, so the natural yield is also going up (probably at around 1/3rd the rate of inflation). So there is no need for you to watch the value of your portfolio dwindling down, unless its small to start with.

I'm invested mainly in Investment Trusts, but with a few Unit Trusts and a couple of EFTs. The portfolio was designed to be pretty much a buy-and-forget deal, and it has proven to be that with few surprises. There have been a couple of corporate actions that needed some decisions, but never more than one a year. The big change will come when I hit my State Retirement age. At that point, all my DB pensions will also be in payment and I would be in a position to convert about half of my portfolio back to being growth/accumulation focused. The question is: with the proposed change tht IHT will apply to pensions, would it be better to continue to have the income and extract it and give it away to my children?

Bostonerimus1

My advice would be to pay off the mortgage from income before you retire...don't use the TFLS to pay it off. Then secure a base of income with a lifetime annuity, there are arguments for either index linked or fixed, and do drawdown from the DC pot. If you can DIY the drawdown, as financial fees are a big drag on your drawdown amount, especially in the early years.

Lowtrawler

The truth is, there are no right or wrong answers on what investment approach will be best when you retire. As Dunstonh points out, there are statistical probabilities about which approach will normally be best but this needs to be tempered by your attitude to risk and a statistical probability is not a certainty.

Personally I expect to spend around 20% more in retirement than I do currently. Through bond ladders, defined benefit pensions and state pension I have this covered (so long as the tax rules, tax bands and state pension rules don't alter dramatically). I also plan to hold around 4 years net spend in more volatile funds to allow for capital repairs and replacements (cars, home maintenance). I will consider changing the bond ladder to an annuity later in life and we own our own home which can ultimately act as a safety net. I know this is much more conservative than many people will be happy with but I don't want to worry about finances once I retire.

With fewer people having access to DB pensions and annuity rates currently at more acceptable levels, it is likely more and more people will be considering annuities for peace of mind in retirement. You sound like someone who has a low threshold to risk and so at least some of your investments should be considered for annuities.

Triumph13

Another vote for a mixed solution.  The headache of drawdown strategies is trying to turn a volatile set of returns into a level income.  If you are prepared to accept a volatile income, then many of those issues go away and you can have a higher equity percentage and expect a greater total income over the long run. 

The greater the amount of fixed, indexed income you have from SP, DB and annuities, the higher the degree of volatility you can put up with from your drawdown portfolio.  I'm a firm believer in creating, if you can afford to, enough fixed income that you can afford to not worry about volatility in your drawdown income.  I find that a lot less stressful than trying to maximise a fixed drawdown income and then worrying about your pot surviving.

We are lucky enough not to need to buy any further annuity as we'll have a couple of small DBs plus our SPs, with cash being used to stand in for these until they arrive. That gives us enough of a floor that we are comfortable with 100% equities in our drawdown pot and a fixed percentage withdrawal method.  Add in the impact of tax and a 50% drop in portfolio value will translate as a 20% drop in our budget.  Everyone will have their own answer to what the mix of fixed to variable income should be.  That one works for us.