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Income drawdown vs annuity purchase at retirement

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Income drawdown vs annuity purchase at retirement

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EdInvestorEdInvestor
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<board guide edit: Given that this thread has been highjacked to become another "income drawdown/annuity purchase" discussion, I have split it into two threads. Please try and stay on-topic this time.

Pal>

Pam

As of next year you won't have to buy an annuity.Instead you can keep the fund invested and take an income from it when you retire.This is called "income drawdown". Later you should be able to leave this fund or what's left of it when you die to your heirs ( though they haven't quite figured out the tax aspects yet. ;)

IMHO, as long as it's correctly invested and you don't take out too high an income, income drawdown can be a better bet especially for women, who tend to live a long time and get !!!! annuity rates compared with men.Although some people will say it is risky - as the value of an invested fund can go down as well as up - with an annuity, inflation eats away at the value and in 20 years its spending power is halved. Not so much a risk as a dead cert that the older you are, the poorer you'll be. :(


Meanwhile here's a brief guide to all the options now available for financing retirement:

http://www.timesonline.co.uk/tol/money/pensions/article5014150.ece
Trying to keep it simple...;)
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Replies

  • dunstonhdunstonh Forumite
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    Is this deja vu?
    Although some people will say it is risky - as the value of an invested fund can go down as well as up -

    Some? Just about every financial professional.
    with an annuity, inflation eats away at the value and in 20 years its spending power is halved.

    Only if you buy a level income.

    Drawdown is investment backed. If you draw more than the investment makes, your fund will drop. If this continues, you end up with nothing left and no income. To reduce the risk of this happening, you have to take less income than you can achieve on an annuity. Indeed, the amount will often be similar to to what you achieve on an index linked annuity at the start. At least then the annuity increases annually.

    So, to achieve a higher income with drawdown, you need to pay more into the pension. But why pay more in if capital retention is important to you? You may as well use ISAs or other investment wrappers.

    As always, I am not saying drawdown is a bad thing. It is however, not a risk free option and this post is made for balance.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • EdInvestorEdInvestor
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    To reduce the risk of this happening, you have to take less income than you can achieve on an annuity.

    Not necessarily.It depends on the yield of the investments and how they perform.The big plus point is that although there is a risk the fund may go down, there is also the possibility that it can go up - and thus deliver a rising, inflation-beating income - and you don't lose the capital :)

    Also, note I am particularly talking about women here.A woman needs an index linked income because she lives so much longer and often retires younger.It is really not hard to beat rates for index linked annuities for younger women even with a very conservatively invested low-risk drawdown, because they are now so poor.

    Annual income from pension fund of 100,000
    Woman, index linked to RPI, 5 year guarantee

    Aged 55 3,339
    Aged 60 3,847
    Aged 65 4,435 [equivalent income for a man at 65, 4,873]

    And this income is taxed, of course. :(

    These figures are not hard to beat from a very low risk investment portfolio much less a racy one.Annuity rates for women are now so poor and the products such bad value that IMHO the "official" generic advice should be reviewed.

    Certainly they are so poor that it is hard to see the value in pension saving by women where there is no employer contribution.
    Trying to keep it simple...;)
  • dunstonhdunstonh Forumite
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    To reduce the risk of this happening, you have to take less income than you can achieve on an annuity.

    Not necessarily.It depends on the yield of the investments and how they perform.The big plus point is that although there is a risk the fund may go down, there is also the possibility that it can go up - and thus deliver a rising, inflation-beating income - and you don't lose the capital :)

    Ahh, this is the whole point though. It can be better if the investment returns are good. It can be worse if not. No-one knows what investment returns are going to be. The lower the risk you take on the portfolio, the lower the returns are likely to be and in turn, the less you will be able to take.

    In the real world, when you start talking about whether someone wants to take investment risk with their retirement income, the most common response is no. No matter what you think is right for you. Even if financially one option should be better/could be better, if it makes the person feel uneasy and scared for their retirment income, they should not do it and stick with the annuity option (which looking at 4.8% in your example for a 65 year old male with income increasing annually, isnt too bad compared with current interest rates).

    Perhaps, rather than hijacking the threads over a period of time saying much the similar things, if you want to create a "drawdown thread", I would be happy to participate on that, as will no doubt all the others who disagree with you ;)
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • EdInvestorEdInvestor
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    Sorry DH, but I don't think that a discussion of pension income options is "hijacking a thread" started by a lady who is asking whether or not it's a good idea to contribute to a pension.


    Another poster said:
    The debate on annuity versus drawdown is pointless at this time and I would imagine will only confuse you further as you mention you dont know anthing about pensions.

    One reason why there is so much disappointment about pensions is because people have been pushed into them without enough information as to whether they are the right way to invest, and whether the way they operate (including the annuity aspect) is suitable for the investor's needs.

    Isn't it about time this information was made available? Why treat investors as twits who shouldn't worry their pretty little heads about these complex matters (leave it to the men...) :rolleyes:
    ...they should ... stick with the annuity option (which looking at 4.8% in your example for a 65 year old male with income increasing annually, isnt too bad compared with current interest rates).

    Actually, IMHO it's very bad even for men compared with current interest rates, given that it's taxed.

    But as I said before I am specifically talking about the annuity issue as it relates to women on this thread because the OP is a woman. The position is very substantially different from that for a man, to the major disadvantage of the woman. IMHO women need to take this on board.

    If you don't agree, then perhaps you could explain why.
    Trying to keep it simple...;)
  • whiteflag_3whiteflag_3
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    Sorry DH, but I don't think that a discussion of pension income options is "hijacking a thread" started by a lady who is asking whether or not it's a good idea to contribute to a pension.

    I disagree- contributing to a pension and retirement options are completely separate issues. Unless you have a pension fund in the first place the choice of annuity etc becomes academic.

    I find it hard to believe anyone would question the merits of joining a pension scheme with a 6% employer contribution. What other investment would be capable of outperforming this given the pension will receive an 6% extra per annum in contributions. Plus the fund will grow virtually tax free and the contributions could get tax relief of up to 40%. The funds are top quality and will more than likely benefit from discounted charges.

    Why for one second would EdInvestor want to put any doubt in anyones mind as whether to join this scheme. Its a no brainer!
  • PalPal Forumite
    2.1K posts
    I agree with Dunston - this thread has been highjacked. I have therefore split the thread into it's two subjects.

    Please keep to the topic going forward.

    EdInvestor: Please name a very low risk investment that guarantees continued annual investment returns of at least 4.5% that increases each year in line with inflation.
  • EdInvestorEdInvestor
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    EdInvestor wrote:

    I am particularly talking about women here.

    A woman needs an index linked income because she lives so much longer and often retires younger.It is really not hard to beat rates for index linked annuities for younger women even with a very conservatively invested low-risk drawdown, because they are now so poor.

    Annual income from pension fund of 100,000 pounds
    Woman, index linked to RPI, 5 year guarantee

    Aged 55 3,339
    Aged 60 3,847
    And this income is taxed, of course. :(


    I think you've missed my point really.
    Trying to keep it simple...;)
  • Whiteflag wrote:
    Why for one second would EdInvestor want to put any doubt in anyones mind as whether to join this scheme. Its a no brainer!
    EdInvestor was the first to reply in the original thread.
    EdInvestor wrote:
    This sounds like a good idea - 6% free money from the employer :)
  • PalPal Forumite
    2.1K posts
    I don't think I have understood at all, however please feel free to clarify. You said:
    EdInvestor wrote:
    It is really not hard to beat rates for index linked annuities for younger women even with a very conservatively invested low-risk drawdown, because they are now so poor.

    So to repeat my question: Please name a very low risk investment that guarantees continued annual investment returns of at least 4.5% that increases each year in line with inflation. Given that annuities are effectively priced based on a mixture of Government and corporate bond yields, I am very interested to hear of any "very conservative" "low-risk" investments that you think are a suitable alternative.
  • Index linked government stock
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