Income drawdown vs annuity purchase at retirement

Nick_C_4

Quote:
Originally Posted by EdInvestor
Oh really. Why do they assume everyone is going to run out?



Because the revenue assumes that everyone is an idiot, as it wants to minimise the potential drain on the state.

And the evidence is there for all to see, in the amount of people up to their eyeballs in credit card debt, failing to save enough towards their retirement in the first place, people who come into loads of money and then go bankrupt etc etc. As a taxpayer, I want the Revenue to force everyone to provide at least a minimum income for themselves, in return for giving them their tax back. That's the deal.

caveat_emptor

Pal wrote:

A cheaper alternative for the Revenue is to require everyone to buy an annuity, removing the asset allocation and direct investment problem entirely. Alternative they could require everyone to get advice from someone who does know what they are talking about. Someone with investment qualifications and experience of working in that market. Like a qualified IFA perhaps?
Or perhaps they could require everyone who is undertaking income drawdown to pass an exam proving that they are competent. The SIPP providers could cover the cost of the examinations and pass it onto the SIPP investors through their fees. Of course these exams would then be needed every five years or so to make sure that the individual is still capable of making investment decisions as they get older.
Instead of using hindsight to constantly take misguided (and frankly offensive) pops at IFAs all the time, why don't you try suggesting a constuctive alternative for a change?
Come on, explain to us how the EdInvestor retirement utopia would work.

People who don't understand pensions investments will do what they do now, buy an annuity. They will not be aware that the annuity provider is almost certain to short-change them. It would be nice if the annuity provider were to tell the client how much he makes from the sum invested so that the client could see the real return on his investment as opposed to the perceived return.
When I started my pension I went to a so-called pensions specialist with qualified consultants and for a sizeable slice of my fund they set up my income drawdown. I found that after this the 'advice' was limited to, as I posted earlier, yearly statements for the commission they were taking. The statements were a copy of the Trustees statements I got within the drawdown provider's fee.
Yes I'm taking a pop at an IFA based on my own experience. I would advise anyone going to an IFA to get IN WRITING, forget the waffle, exactly what the IFA is going to provide with the fees being charged and always ask for cost of both commission and time-charged fees. The IFA will not, in my experience, volunteer this information for obvious reasons.
Also ignore anything in the terms and conditions that says 'may do' because, again in my experience, in IFA speak this means 'won't do'.

EdInvestor

It's amazing, isn't it, how the vast majority of Americans, Australians and Canadians manage their pensions via income drawdown, yet Brits are seen as too ignorant and incompetent to follow suit.

Can it be that the industry makes more money out of them not doing so?

I am pleased to see that the Turner report is recommending that the Government looks into ways of expanding and promoting drawdown in future to solve what it describes as the 'annuity problem'.

It's certainly a problem, believe me.

dunstonh

It's amazing, isn't it, how the vast majority of Americans, Australians and Canadians manage their pensions via income drawdown, yet Brits are seen as too ignorant and incompetent to follow suit.

They have their advisors and are willing to use those advisors.

oceanblue_3

dunstonh wrote:

They have their advisors and are willing to use those advisors.

In addition, the concept of caveat emptor (buyer beware) is far more prevalent in these countries, even for transactions involving less tangible financial products. This promotes a culture of self-reliance which, unfortunately, is all too rare in the UK.

I have a number of ex-patriate US clients who cannot believe how molly-coddled yet stifled UK consumers tend to be: they attribute this to an absence in this country of what is taken for granted across the Atlantic: that whereas individual citizens are expected to support the State, they should not expect any reciprocal treatment.

EdInvestor

...whereas individual citizens are expected to support the State, they should not expect any reciprocal treatment.

You can see why Americans are always demanding "small Government" and absolutely hate paying taxes, and also why it's almost impossible to reform social security and medicare - what they have got, they hang onto for dear life

In addition, the concept of caveat emptor (buyer beware) is far more prevalent in these countries, even for transactions involving less tangible financial products. This promotes a culture of self-reliance which, unfortunately, is all too rare in the UK.

The way to encourage this IMHO would be to drop the misselling and FOS system.Of course IFAs might find there was a sudden shortage of customers as well...;)

Pal

Ed: Are going to ignore my question and continue to use hindsight to critisise then? Have you no ideas as to how things could be improved?

Can it be that the industry makes more money out of them not doing so?

No, it can't. The Revenue sets the rules in order to maximise state finances. It has nothing to do with the profitability of insurance companies. After all, if that was the objective they would not have removed ACT credits on UK Equities, which significantly reduced the dividend income that investment managers and insurance companies receive each year.

It's amazing, isn't it, how the vast majority of Americans, Australians and Canadians manage their pensions via income drawdown, yet Brits are seen as too ignorant and incompetent to follow suit.

I think you will find that the "vast majority" of Americans do not have any pension provision. Isn't it also true that most American pensioners are on fixed incomes? Does this strike you as being sensible?

caveat_emptor wrote:

People who don't understand pensions investments will do what they do now, buy an annuity. They will not be aware that the annuity provider is almost certain to short-change them. It would be nice if the annuity provider were to tell the client how much he makes from the sum invested so that the client could see the real return on his investment as opposed to the perceived return.

What makes you think that annuity providers are "short changing" their customers? Annuity rates are based on the bond investments in which the annuity provider invests the money, and I think you would be surprised at how small the profit margin is. The last estimate I saw of the expense loadings (a few years ago now) was around 10% or so of the annuity cost. For that the company has to invest the money and carry out pension payroll for the rest of the individual's life.

If the profit margin was high, there would be a lot more annuity providers in this country instead of the relatively small handful.

I am neither pro not anti annuities or drawdown, as each is suitable for different types of people. However I cannot see a realistic alternative to the current rules that would satisfy the Revenue's requirement to minimise the drain on the state.

Of course if any of you have any sensible ideas instead of just critisising the existing rules....

EdInvestor

If the profit margin was high, there would be a lot more annuity providers in this country instead of the relatively small handful.

These days annuity provision is unattractive as the FSA requires the insurers to actually buy the bonds that are providing the annuitant's income and hold onto them,so the annuity is genuinely safe, rather than invest the money eslewhere ( such as in the stockmarket) and make a profit on top, as used to happen in the old days.....


Re your original post Pal, most people doing drawdown will have enougn index linked state pension/S2P and other company pensions to cover basic needs. Those who don't will normally be too nervous to do drawdown anyway. The Revenue is far more concernend about drawdowners avoiding IHT than claiming benefits

Pal

So, in the past, when you have been recommending drawdown to every poster here, you are assuming that they already have a full state pension and index linked private company provision, despite the fact that you never ask them before making your "recommendations"?


Quite an assumption, don't you think?

And I'll ask my question again, as you still haven't answered it:

Instead of using hindsight to constantly take misguided (and frankly offensive) pops at IFAs all the time, why don't you try suggesting a constuctive alternative for a change?

Please note that this challenge is open to everyone, not just EdInvestor. I am genuinely interested in hearing any sensible alternatives to the current rules.

EdInvestor

I hear on the grapevine that the discount SIPP provider Hargreaves Lansdown is shortly planning to offer income drawdown.

This is good news for those who want to invest mainly in funds,as H-L offers a particularly competitive deal in this area.Other providers are better for shares.

Looks like the IDD product will go live in a few months' time, but initially may not be open to transfers in of funds already in drawdown.