Income drawdown vs annuity purchase at retirement

Pal

Which part of your brain is unable to get around the fact that inflation linked annuities are available to protect against inflation, or do we have to keep mentioning it every ten seconds on this thread?

EdInvestor

... inflation linked annuities are available to protect against inflation..

,

Very few people buy them as they are regarded as poor value for money - the starting income is very low.

If there is a big burst of inflation, interest rates would be likely to rise to match it - that's what happened in the past. If you have your fund in drawdown, you can switch it to the SIPP's cash fund or a money market fund, and your return will rise to something near the inflation rate.Whereas with a normal level annuity it will stay fixed.

Isn't it better to have the flexibility to do this and also the possibility of your fund growing and paying out a higher income as time goes on, even if inflation remains low?

If you choose a low cost SIPP for your drawdown so you pay virtually no charges (very important) and invest it in a mix of dividend-producing equities, commercial property funds, and some bonds/cash if you like, this should be quite possible.

Pal

So during the super inflation in the 1970s interest rates matched RPI rates did they? And high interest rates in the early 1990s were caused by high inflation were they?

So your suggestion is that, to protect against inflation, people should invest in stocks, which will tend to fall in value when inflation is high? Or that they should invest in bonds, which fall in value when interest rates increase? Won't both of these things reduce the capital that you are so keen to protect and so reduce the income you can take from your SIPP? You think that this is a good idea for people who would rather be out playing golf and seeing their grandkids than worrying about their retirement income?

Very few people buy them

Really? Where are your figures to back that up?

as they are regarded as poor value for money

Really? By who? SIPP providers and those with crap websites to promote?

deemy2004

Why buy the annuity when you can buy the index linked government bonds ! That way you retain the capital.

dunstonh

Quote:
... inflation linked annuities are available to protect against inflation..
,

Very few people buy them as they are regarded as poor value for money - the starting income is very low.

Cant give industry figures but 86.4% of my annuities arranged in a rolling 12 months have been on an index linked basis. I would say that is similar to those arranged over previous years. The most common reason for going level is when there has been a very high guaranteed annuity rate which is only available on a level basis.

EdInvestor

86.4%

Somehow I get the impression Dunstonh doesn't arrange too many annuities....;)

BTW I am really quite surprised about how much heat and fire this topic seems to generate among the "financial services professionals" who contribute to this site.

I realise that encouraging people to manage theoir own money without benefit of "advice" from said professionals would impact their business if it caught on, but still -is all this flaming really necessary?

EdInvestor

Haeven't located any figs yet, but here's a comment from the Chartered Accountants:

Flat annuities are more common because index-linked annuities are significantly more expensive and also because no prospective annuitant can be sure of how long he or she is going to live, a simple factor which acts as a disincentive to people to plan for an increasing income stream over a period of time.

2.2 In referring to flat annuities, the document does not address an issue which is a major problem with them, namely that any increase in inflation will have a dramatic effect on their real value. We believe that it is basically unfair for a retirement system to leave retired persons so exposed both to the annuity rates which prevail at the time at which they buy their annuities and then to sudden economic changes which can materially alter the value of their pensions in payment.

http://www.accaglobal.com/technical/responses/archive/411867

dunstonh

Somehow I get the impression Dunstonh doesn't arrange too many annuities....;)

How on earth do you get that impression? As 90% of my business is pension based, it follows that annuities reflect that. A couple a week would be average. Last week I did 5. 2 RPI, 1 3% increasing and 2 level. One of the levels had an 11% GAR on level basis only (and a 29% tax free lump sum which would have been reduced if transferred) and the other was an "old boy" who didn't want to listen to anything as he had made his mind up. Consequently, my suitability report made that clear with the increasing option my recommendation and his choice documented as not following my advice.

BTW I am really quite surprised about how much heat and fire this topic seems to generate among the "financial services professionals" who contribute to this site.

Its not the topic that causes the heat. Its your unqualified posts with mis-information and unbalanced comments which cause the heat.

I realise that encouraging people to manage theoir own money without benefit of "advice" from said professionals would impact their business if it caught on, but still -is all this flaming really necessary?

The professionals that post here do so at their convenience. What gets said has no impact on income/business at all. Much of the time, you are mostly right in where you are heading with your comments. However, you tend to assume that one particular option is suitable for everyone and go all in for that option with no warnings or comment for the alternatives. Many options have pros and cons and you do tend to show only the positives. That means that we then have to post to balance your comments which then means we look like we are against it when we are not.

Haeven't located any figs yet, but here's a comment from the Chartered accountants:r

And when was the last time a chartered accountant arranged an annuity?

A few years back (quite a few now) i told a client to PEP his free NU shares (£11k) and then 30 days later we would put them into a pension. This would avoid the CGT and then, as a self employed 40% tax payer, would significantly reduce his next tax bill without costing him a penny. The accountant told him he couldnt PEP the shares and then couldnt pay the money, even if he could, into a pension. This was from one of the parnters on on the most highly regarded accountants in the area. I saved him thousands in tax. The accountant would have cost him thousands.

The moral of that story is that accountants used to give financial advice and their information is often out of date and they should not be relied upon to give financial advice as it is not their business. In exactly the same way you don't go to a financial advisor to sort your tax out. We may have overlaps but a little knowledge can do a lot of damage.... hmm, like someone else we know here

Personally, I would guess that most pension annuities are arranged without advice and I can imagine that the individual doing it would go with the level option because they don't think about inflation and go with the higher figure.

When i do them, my back office software prints out a nice chart showing best level option against best increasing option over a 30 year period. That graph virtually kills off the level option as a viable option in the mind of the policyholder.

dazman_3

Just read a good article today on BBC News
http://news.bbc.co.uk/1/hi/programmes/moneybox/4300342.stm

I’m opposed to life insurance saving plans and annuities, with all their commission to Salesmen. However some people are suddenly going to be faced with new and unknown investment choices with a lot of capital….

stuttard

Does anyone know of the cheapest company providing income draw down for SIPPS ?