Income drawdown vs annuity purchase at retirement

EdInvestor

dunstonh wrote:

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

Of course - the majority of the population doesn't have a pension in the first place.

But this is the MSE website.I think it's reasonable to assume that people reading what we say have some knowledge of finance and an interest in learning more.

The concept of DIY and using discount brokers and IFAs applies just as well to your retirement income when you come to spend it as it does when you're accumulating it.

dunstonh

But this is the MSE website.I think it's reasonable to assume that people reading what we say have some knowledge of finance and an interest in learning more.

I disagree. The posts we read most of the time here (excluding regulars who do seem to have a better grasp of things) come from people who do not have the knowledge. Then you have some from those that think they have the knowledge but don't.

ralord

I live in Australia and have a pension fund in the UK and wish to explore the Income Draw Down 1) How do I find a low cost provider ? 2) Who decides where the money is invested 3) How does an ex Brit now living o/seas open a bank account in the UK eg I do not have the 3 - 5 identitiy checks to prove I am a UK resident of which I am not. so how do I draw down my pension or funds and keep them in the UK ?

EdInvestor

Hi ralord

Usually people doing income drawdown first move their pension to a SIPP.Once in the SIPP (and after taking your 25% tax free cash), you decide how to invest the money.

There shouldn't be too much difficulty opening an online SIPP and managing it from overseas.A UK bank account isn't actually necessary, the SIPP provider can pay your income into any bank you choose.

Opening an onshore bank account is verging on the impossible, but you could consider opening an offshore account with a big UK bank to receive the money if you want to keep it in sterling.As of April you won't have to take an income from the fund if you don't want to.

The following two providers operate low cost online SIPPs and offer income drawdown:

https://www.sippdeal.co.uk ( good for share investments)
https://www.hargreaveslansdown.co.uk (fund investments)

Note that "protected rights" pension money cannot presently be moved to a SIPP.

Pal

EdInvestor wrote:

The following two providers operate low cost online SIPPs and offer income drawdown:

www.sippdeal.co.uk ( good for share investments)
www.hargreaveslansdown.co.uk (fund investments)

ralord - It is worth reading a few of the other threads on this board before taking Ed's advice that hargreaveslansdown is somehow "good" for fund investment:

http://forums.moneysavingexpert.com/showthread.html?t=153029&page=3

Personally I suggest that you speak to a qualified IFA before reaching any decision.

dunstonh

Evil grin time.

I arranged an annuity today on level basis on a 400k pension fund. As I was getting the application signed I was just picturing what comments Ed would make if she knew I was doing that.

EdInvestor

One would hope that anyone with a 400k pension fund who wants a level annuity has a much larger set of additional investments/pensions which he expects to produce a growing income in the years to come.

It must have really annoyed you DH to earn a piddling 4k for organising a 400k fund.Unless you managed also to get away the usual investment bond for the tax free cash as well of course.

Unfortunately there are quite a few people around who manage to accumulate quite large pension funds and still find themselves nothing like as well off as they expect in retirement .

Who would ever have thought that a fund of nearly half a million quid would only buy a (taxable) income about the same as the average wage?

You can see why people think pensions are really pathetic.

dunstonh

One would hope that anyone with a 400k pension fund who wants a level annuity has a much larger set of additional investments/pensions which he expects to produce a growing income in the years to come.

Yes, it was totally suitable for this person. Other rising income available but needed higher level of income now whilst that other income was still low.

It must have really annoyed you DH to earn a piddling 4k for organising a 400k fund.Unless you managed also to get away the usual investment bond for the tax free cash as well of course.

Actually, I will get less than that as it is fee based. Plus the investment will be an ISA and OEIC/UT done on no initial charges but with the normal 0.5%p.a. held to provide reports, rebalancing and ongoing advice.

Who would ever have thought that a fund of nearly half a million quid would only buy a (taxable) income about the same as the average wage?

I can't see a problem with that. Had it been in a bank account, it would have got considerably less. The problem is people expect the rates of returns from 10-20-30 years ago and that is just not realistic nowadays. In reality, real rates of return are no different but someone starting to pay £50pm in 1988 shouldnt expect to make big money if they have never increased it over that £50pm. I mean, back in 1988 you could fill your car car on a near empty tank for under a tenner. Look at it now.

Anyway, I just couldnt help having a little smile when level annuity was the best option. Shame I couldnt have really topped it off with the investment bond for you. I honestly sat there thinking of you Ed whilst I had the cup of tea and cake (especially home baked for my visit) and doing some of the paperwork

EdInvestor

This is for anyone planning to move a pension fund into income drawdown ( now renamed "unsecured pension" or USP), whether or not the plan is to take an income right away.

You may be doing this in order to get your 25% tax free cash out of the fund and you may want to keep contributing to the remaining fund.

In order to do this, you need to choose a type of drawdown (aka USP) called "phased drawdown".

Under this system your fund is split into 1000 bits, so that you don't have to convert ( take benefits or "vest" in the jargon) them all at once. This was originally designed as a rather elaborate tax avoidance plan, so that people could cash in their fund in bits, taking part of it as an annuity and part in cash every year, which cut down their taxable income (pensions are taxable )

Why use it now?

Two reasons:

1.If you vest the entire fund all at once, this means you can't put any more money into it.To keep on contributing you would need to start a new pension plan.

2.The Revenue has now changed the rules so that after you actually retire and start taking an income from your drawdown plan, you only have to have your plan valued to set your max income every five years, instead of every three as now.

This may be fine if your fund is smaller as your income won't be reduced - which can happen if your fund has gone down in value a lot. But it's not so great if your fund is going UP and you want to get your pension income increased.

[Quite why this rule has been changed is a mystery to us all. Efforts will be made to get it reorganised later as it seriously affects some people who are already in drawdown under the old rules.]

In the meantime, to solve this problem, phased drawdown can be used. This means that every time you decide to "vest" another small sliver of your fund, the actuary must revalue it.

So if you like, you can have your fund revalued annually later on just by doing that, thus avoiding the 5 year rule.

Make sure you leave around 50 out of 1000 segments still unvested when you take your tax free cash, so as to take advantage of this loophole later on if you need it.THis will hardly reduce your tax free cash at all, and will also mean you can still contribute into the fund.

And they said A-day was supposed to be about pension simplification :rolleyes:

SilverSurfer2_2

I am trying to operate my own version of the 'drawdown schemes' offered by some financial institutions and would welcome any advice on how best to calculate drawdown. Commercial schemes do not seem to match our objectives. Commercial schemes seem to restrict drawdown in order to preserve capital while annuities maximize income but remove access to our capital. All of them have to recoup their overheads/profits.


I am 77 this month and my wife is almost 73. I have modest Civil Service index linked pension and my wife has a smaller one. We have substantial capital that we built up to supplement them. I have always managed our investments and will continue to do so as long as I am able. I call them my 'Pension Fund'.

I want to lay down guidelines for financial management for my widow and trustees/executors/attornies after my death/incapacity. I have executed a Power of Attorney in case I become incapable of taking decisions.

We have the usual wills leaving the IHT exempt amount to a trust on first death.

Our objectives are to live as comfortably as possible and be generous to our family while we are alive, rather than live as 'poor old pensioners' who preserve their capital in order that our descendants have the maximum inheritance. In an ideal world the estate of the survivor would be just enough to pay for their funeral and our family would remember us as the source of a lot of help at the time they were most in need.:j


WE ARE NOT ASKING FOR COMMENTS ON OUR PHILOSOPHY OR HOW TO INVEST OUR PENSION FUND.

The scheme should rely on readily available statistics and avoid drastic changes to 'income'.

I need to budget our outgoings so that we draw 'a reasonable amount' from our 'Pension Fund'.

Please comment on my proposals:-
1) Calculate our Net Worth = Liquid assets + market value of equity based assets + Written Down Value, WDV, of cars + a fraction of the value of our Home
2) Find out the annuity (joint survivor, 3% increasing if index linked not offered by anyone) that Net Worth could purchase at current rates.
3) Find out the decrease in net after tax of pensions when I die (Pension Drop).
4) Find out the % of the value of our home that could be released by an Equity Release scheme. This data is needed for item 1.

Each year these calculations would be updated.
This would allow for fluctuations in our Net Worth and annuity rates as we get older.

Target expenditure = Net Pensions +'Annuity' item 2 - estimated reduction in WDV of cars - Pension Drop

Pension Drop is included to avoid a sudden drop in Target Expenditure should I die first. This is much larger than the change should my wife die first.

Are there any factors I have not allowed for?
In practice the estate of the survivor would probably be greater than 50% of the value of our home unless the council charged the cost of admission to a nursing home.