Income drawdown vs annuity purchase at retirement

dazman_3

OB, re your posts to EdInvestor

Why would this option be available if it was so bad? Why would you care about inheritance tax, because presumably s/he’s going to lose all the money anyway?

Think of people stuck in Equitable Life reaching retirement and having to buy annuities now - it’s a disaster. At least with drawdown there is some scope for recovery over the next few years. Also, over 40 years or so both the FTAS and S&P500 have made 10% (or so) ACGR so why are you guys convinced markets will fall in the future?

dunstonh

so why are you guys convinced markets will fall in the future?

Because its the unknown and you are playing with the only source income that many people will have. If there are other sources of income, then its certainly a move to consider.

lso, over 40 years or so both the FTAS and S&P500 have made 10% (or so)

And what makes you convinced we will see those returns again? The last 2 decades have seen returns reduce compared with previous decades.

Endowments always paid out surpluses until recently. You cannot go into these things saying that you will certainly be better off.

Financial advisors get accused of not pointing out the risk involved with investments. When we do correctly point out, what is a high risk transaction, we get laughed at by the casual investor who hasnt seen the results of a failed drawdown. Just ask those that were doing well in the 90s and then suffered the stockmarket crash but didnt have time left, due to their age, to allow it to recover.

You will not find a financial advisor against drawdown. It is not the answer for everyone whereas it is presented by a few unqualified individuals here as if it is.

dazman_3

I do actually agree that for your average person with only their pension the simple known option could be better. However for the types of people reading this board, many may be lifetime investors and I would expect they have realised better gains in low cost investment products or their pension fund than is offered in the annuity. They, like me may be reluctant. This thread (although damn long) was a good insight into the subject. You guys were pretty negative though..

dunstonh wrote:

Just ask those that were doing well in the 90s and then suffered the stockmarket crash but didnt have time left, due to their age, to allow it to recover.

If they stuck their ground, they would be back now and definitely wouldn’t want to have bought the annuity in the last couple of years. If nothing else, drawdown gives this option to wait a while after a crash.

dunstonh wrote:

You will not find a financial advisor against drawdown. It is not the answer for everyone whereas it is presented by a few unqualified individuals here as if it is.

oceanblue_3

[However for the types of people reading this board, many may be lifetime investors and I would expect they have realised better gains in low cost investment products or their pension fund than is offered in the annuity.]
.......and many may not be. I never make any assumptions about new clients, and I am reluctant to make assumptions about the people who post here.

[You guys were pretty negative though.] Used properly, phased drawdown from a SIPP is a superb product. However, in my opinion, it needs to be set up and monitored very carefully; although some people tuning in to this site will have the confidence and knowledge required, some will not - some posters assume that SIPP's will suit everyone, and their comments imply a universality that is unfair and misleading.

[If they stuck their ground, they would be back now and definitely wouldn’t want to have bought the annuity in the last couple of years.]

Dazman, you have to think this through.........since when has phased income withdrawal been available? Let's assume that they started to really take off in mid-1998: how would you describe equity performance in that 8-year period? Dunstonh is right - a simplistic attitude to investment returns can have dire consequences for those whose principal source of income is their drawdown pension. Please don't confuse negativity with caution.

dazman_3

Thanks OB, I think the main problem for most retirees and drawdown will be understanding them, and working out if they would be beneficial, as the length of this thread shows!

oceanblue wrote:

[You guys were pretty negative though.] Used properly, phased drawdown from a SIPP is a superb product. However, in my opinion, it needs to be set up and monitored very carefully; although some people tuning in to this site will have the confidence and knowledge required, some will not - some posters assume that SIPP's will suit everyone, and their comments imply a universality that is unfair and misleading.

EdInvestor

A simple drawdown is not that hard to set up and organise. The important aspect is to make sure on a long term basis that you don't take out more money ever year than the portfolio actually earns.

Let's say you invest it in a mix of shares which pay an average dividend yield of 5%, commercial property funds which pay an average divi yield of 6.5%,and bonds or cash paying an average yield of 4.25%,

Depending oin the proportions of each asset class, this Drawdown should be able to pay out an income of between 5 and 5.5% annually and this income should be pretty stable even if the capital value of the portfolio is fluctuating, as it will.

You will be allowed to take quite a bit more income than this under the drawdown rules, which allow a higher income than an annuity. What you need to do is to make sure the extra on top of the 5% is covered by the capital growth of the portfolio.

If the capital growth exceeds the allowable income amount, well and good, this will mean that when your portfoliuo is next reviewed, then the allowanble income you can take will be revised upwards. Of course if the value has gone down, your income will also be revised downwards.

I suppose would be possible to lose your fund by punting it all on the likes of Marconi shares, but the main drawdown victims I have come across were actually invested in Equitable life managed pensions ( that was a drawdown invested in the With profits fund) and these people were in fact seeking safety.

Most people are naturally pretty cautious when it comes to pensions: this is why it is so easy to take advantage of their need for a bit more income by selling them supposedly safe but rubbish products like With profits annuities and high charge investment bonds, which destroy their capital. :mad:

I have found that it is quite possible to grow your pension fund while at the same time taking a higher income than an annuity pays by using drawdown prudently.A key factor is to use a low- cost Sipp provider so that you pay no charges.IFAs are unlikely to suggest this to you for obvious reasons.

dunstonh

I suppose would be possible to lose your fund by punting it all on the likes of Marconi shares, but the main drawdown victims I have come across were actually invested in Equitable life managed pensions ( that was a drawdown invested in the With profits fund) and these people were in fact seeking safety.

Well you would do at your website! However, that is does not reflect the majority or average.

If they were seeking safety, then they shouldnt have been doing drawdown.

EdInvestor

However, that is does not reflect the majority or average.

It does however reflect the majority of drawdown misselling and failure.That was why Equitable was appointed (before the disaster which befell it in 2000) by the PIA, the then regulator, to run a preliminary investigation into misselling, because most of the complaints were coming from Equitable victims even then.

It's IMHO pretty silly for everyone to go on and on about drawdown risks based on a majority of instances emanating from one incompetetently run and negligently regulated life insurer whose salesmen persuaded clients 10 years ago to use an unsuitable investment strategy.

oceanblue_3

[It's IMHO pretty silly for everyone to go on and on about drawdown risks based on a majority of instances emanating from one incompetetently run and negligently regulated life insurer whose salesmen persuaded clients 10 years ago to use an unsuitable investment strategy.]

This is incorrect: the product itself has the potential to devastate unwary investors.

EdInvestor

...the product itself has the potential to devastate unwary investors.

So does a bog standard level annuity: all you need is a burst of 1970s style inflation and you've had it for the rest of your life - your income is reduced to a pittance. Even at current rates of inflation an annuity almost halves in value in 20 years - and many people will live longer than that (especially women).

I wonder how many advisors and salesmen are old enough to remember the inflation levels we had in those days? Absoluely disastrous for anyone on a fixed income.Those coming up to retirement now will remember.

Who can guarantee it won't happen again?