Income drawdown vs annuity purchase at retirement

Pal

Pal wrote:

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.

No ideas then Ed?

EdInvestor

Pal

Not quite sure what you want to discuss.Is it this:

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....

The rules are about to change significantly - not sure if you are referring to the current ones or the new ones.

Pal

So you don't bother reading previous posts on threads before responding to them? I was asking for your ideas on how current annuity rules could be changed so that the state benefits system was still protected. You critise the current rules constantly but have never mentioned any practical ideas of your own for how the rules could be changed. Proposals for changing the old or new rules are fine.

EdInvestor

The new rules are an improvement on the old but they don't go far enough. Compulsory pension annuities should be dropped completely and the existing pre aged 75 arrangements on income drawdown extended for life.

Why would anyone think that an individual who had successfully operated a drawdown plan for between 10 and 25 years without recourse to the state benefits system would suddenly become a danger to it after he turns 75? Doesn't make sense does it?

The income drawdown system has inbuilt restrictions on how much income you can take per annum that are based on annuity rates. So any pensioner who thinks he's going to be able to withdraw his pension fund and spend, spend, spend is sadly mistaken.

Incompetent investment of a drawdown fund can be a problem, as we saw in the last crash when IFAs put people into With Profits funds, which are totally unsuitable as a drawdown investment. But then, Equitable victims with With-profits annuities will be in an even worse position and they cannot recover, whereas drawdwon investors can.

A well-invested income drawdown with very low costs has the potential to increase in value over the years giving its owner a rising income. This means he is less likely to become dependant on benefits than the persion who has a small fund used to buy a level annuity which has been overtaken by inflation. Such a person is almost certain to be accessing the benefits system after 20 years if he has no other income.

The Revenue is not really bothered anyway about drawdown as a threat to the benefits system: most people using the drawdown system so far have been well off.Rather the bureaucrats are suspicious that these plans might enable people to use the pension tax relief system to avoid tax, particularly IHT.

If the Government extended the current post retirement drawdown system ( under which if you die before aged 75 your heirs/dependants can take your fund minus a 35% tax deduction in cash) then this would likely encourage more people to make provision for their old age via pensions and thus become more self reliant not less.

The current outdated compulsory annuity system (unknown in any other country) is actually now having the reverse effect.

dunstonh

Incompetent investment of a drawdown fund can be a problem, as we saw in the last crash when IFAs put people into With Profits funds, which are totally unsuitable as a drawdown investment. But then, Equitable victims with With-profits annuities will be in an even worse position and they cannot recover, whereas drawdwon investors can.

Hindsight is a wonderful thing. Prior to the crash, with profits funds were a good way to achieve the critical yield. However, as drawdown is subject to investment risk, the potential is there with any asset class for the same to happen.

Anyone with equities after the crash would have seen a significant drop in value regardless of where they purchased their investments from. So having another dig at the IFAs is really pointless.

A well-invested income drawdown with very low costs has the potential to increase in value over the years giving its owner a rising income. This means he is less likely to become dependant on benefits than the persion who has a small fund used to buy a level annuity which has been overtaken by inflation. Such a person is almost certain to be accessing the benefits system after 20 years if he has no other income.

I love the way you continue to assume that things always go up when you do it yourself but down when an IFA does it.

caveat_emptor

EdInvestor wrote:

.......
The income drawdown system has inbuilt restrictions on how much income you can take per annum that are based on annuity rates. So any pensioner who thinks he's going to be able to withdraw his pension fund and spend, spend, spend is sadly mistaken......

I've said my piece on annuity v drawdown and my experience with a so-called reputable IFA so I won't repeat it here. But after A-day and the age of 75 there is an even more serious restriction to income and that is that maximum income is limited to 75% of the equivalent annuity value. Why?
In doing so it seems that the Government is determined to make drawdown less attractive.

EdInvestor

dunstonh wrote:

Anyone with equities after the crash would have seen a significant drop in value regardless of where they purchased their investments from.

Yes but what's importnat most of the time is the income, not the over all value of the fund.Income need not bve affected by stockmarket crashes.And with the new rules of 5 years between valuations, that's a pretty good period for a fund to recover any losses - and of course the income will go up anyway due to age,so you'd have to have pretty horrendous losses for your income to go down

I love the way you continue to assume that things always go up when you do it yourself but down when an IFA does it.

Given the charges IFAs extract from managing drawdowns,IMHO it's quite justifiable to expect better performance without them especially since many of them don't demonstrate particularly outstanding investment skills.

dunstonh

Yes but what's importnat most of the time is the income, not the over all value of the fund.Income need not bve affected by stockmarket crashes.

Capital value is important. Lets say you were aged 73 before the crash and at 75 you had to commence with a fund that was valued at nearly half what it was prior to the crash.

And with the new rules of 5 years between valuations, that's a pretty good period for a fund to recover any losses -

Is it? Nothing written in stone to say 5 years is enough. It probably would be but nothing to say that the next one would take ten years. Just look at other stockmarkets in the western world, particulary Japan.

Given the charges IFAs extract from managing drawdowns,IMHO it's quite justifiable to expect better performance without them especially since many of them don't demonstrate particularly outstanding investment skills.

I find that the IFAs I know that deal with drawdown usually have G60 and other advanced qualifications, including investment porfolio qualifications. To say that they do not demonstrate particulary outstanding investment skills is an insult frankly.

If you want something, you can choose to do it on the cheap and you may get lucky, you can choose to do it through someone who is allowed to do it but not particulary an expert or you can go to an expert. The choice is with the consumer.

EdInvestor

If you want something, you can choose to do it on the cheap and you may get lucky, you can choose to do it through someone who is allowed to do it but not particulary an expert or you can go to an expert. The choice is with the consumer.

Anyone is "allowed to do it" . I read the other day that IFAs get paid 3% commission by the insurers to sell a drawdown plan.On a typical 100k fund, that's 3k - half your first year's pension income.And that's before you pay the insurer's high charges, and the IFA's annual fee... :mad:


There's no need to waste money like this. Better just transfer it yourself to a cheap online provider like Sippdeal, or Alliance Trust, or Hargreaves Lansdown (when they start their drawdowns soon).Pay little or nothing to transfer in, and no annual fee.

dunstonh

There's no need to waste money like this. Better just transfer it yourself to a cheap online provider like Sippdeal, or Alliance Trust, or Hargreaves Lansdown (when they start their drawdowns soon).Pay little or nothing to transfer in, and no annual fee.

The majority of the population wouldnt have a clue what to do. The fees cover paying someone to do it.