Income drawdown vs annuity purchase at retirement

jamesd

Thanks, that's helpful so we know why you want the money. Did you know that it's possible to take only part of the pension now to get just the amount of money you need?

I'm wondering if you'll have more pension income (state pensions, perhaps others?) when you're 65.

If you will have that income then you could take only enough of your pension now to provide the tax free lump sum and income that you need to last until 65, then you could take the lump sum and income from the remainder then.

The advantage of this staged retirement planning is that you can leave more of the money that you're not taking anything from in equities to recover some of the capital value drop.

There are staged retirement products but the simple and cheap approach is something like starting with the 83k and:

1. Taking benefits from 17000 now, leaving 66000 with no benefits taken. The 17000 can be taken as 4250 tax free cash and the other 12750 can be used to buy an annuity or left in income drawdown, perhaps invested in bonds and equity income funds to provide income. 5% of the 12750 would produce about 640 of income giving you 4250+640 = 4890 income in the first year. Plus the 12750 in drawdown and the 66000 still around.

2. In the second year, you could take benefits from 15000, leaving 51000 with no benefits taken. 25% of the 15000 would give you 3750 and you'd have 11250 left of the 15000. That 11250 adds to the 12750 from the first year if you're using drawdown and 5% of the combined 24000 would give about 1200 income. So total income in year 2 of 3750+1200 = 4950, 24000 carried over in drawdown still and 51000 still with no benefits taken.

3. In the third year, you could take benefits from 12000, leaving 39000 with no benefits taken. 25% of the 12000 would give you 3000 income. The remaining 9000 adds to the carried over 24000 and the 33000 total in drawdown at 5% income would give 1650 income, for a total income in year 3 of 3000+1650 = 4650. The 33000 stays in income drawdown and you also still have the 39000 with no benefits taken.

At the end of this you have:

A. The income for the three years is spent.
B. 33,000 in income drawdown. You can either leave it in that or buy an annuity. Or some combination.
C. 39,000 with no benefits taken and full flexibility to use it in some way.

That 39,000 is money that you know you won't be taking during the three years so you can feel more free to leave it invested in more volatile investments, while the portion you're planning to take each year could be put into bonds or low volatility (low up and down movement in capital value) investments.

What I'm trying to do is find a way to show you how you can be sure of your income while still having some chance to get some capital value recovery when the stock markets recover. I'm also trying to leave you with as much available 25% tax free cash as possible at the end of the three years, since that money as a lump sum is more flexible for emergencies than the drawdown income or annuity income.

jamesd

wolverene wrote: »

"So the person I have to rely on totally is the IFA so if it all goes "t***s up" its a case of better luck next time?

Well, it's fairly common for people here to give opinions about the advice IFAs give. You could do that and we'd certainly tell you whether the plan looks decent or not. Particularly if not.

EdInvestor

On the assumption that wolverine's state pension will kick in in 3 years, seems to me it would be simpler if he took the tax free cash out now and used that to pay his income over the period.

He could leave the rest of the fund invested in drawdown taking no income, so it can benefit from a recovery .For the time being he could keep it in cash and he would pay no charges in a low cost SIPP, such as Sippdeal's and make no losses.He would pay only a very low amount to do the transfer if he used this company (about 300 quid in all to process drawdown as well.)

Then he could start to learn how to invest the money later (it sits in cash getting interest like a bank account for now). If he couldn;t get a grip, he could later pay a fee to an IFA for some help.(No need to pay one now!)

That way he can extract some money, stop the losses, reduce the costs, and keep the capital, so it can grow again later, unlike with an annuity.

I do sympathise with anyone trying to make this decision at the moment, in the midst of all this market volatility.:( Rather than be panicked into a decision which could be the wrong one, a temporary "holding" approach as above might be a better idea.

wolverene

Very constructive comments from you both. I shall mull over this advice so I can make sense of it, so will come back after digesting it all. My first reaction was to scream out `Aaaargh` and run out of the room

By the way I will be looking forward to getting State Pension in June 2010
to add to whatever I get from my pension pot.

Talking it over with my other half we had nearly decided to go for the 25% tax free- about £20000 - and the remainder put into an Annuity bringing in about £5000 pa (£425 pm) with a 10 year guarantee for the wife, she will have her own PP and State pension as well in the future. If I pop my clogs she can just stick me in the garden shed so the annuity can carry on paying out:rotfl:

jamesd

The trouble with living on the tax free lump sum is that you end up without having that lump sum later and that's a lot of lost flexibility. Better to take only half of it gradually and keep the rest available for emergencies later, taking that chunk only when the markets have recovered a lot.

An income drawdown pot doesn't expire when you do. Dependents inherit it, after a 35% tax charge on the pot capital value. So 65% carries on until your other half dies. That's likely to be when she's between 85 and 95 years old unless she's unusually unhealthy. A ten year guarantee isn't long, given life expectancies today.

dunstonh

The trouble with living on the tax free lump sum is that you end up without having that lump sum later and that's a lot of lost flexibility. Better to take only half of it gradually and keep the rest available for emergencies later, taking that chunk only when the markets have recovered a lot.

Phased drawdown could be the answer to that as you only part crystallise periodically.

EdInvestor

dunstonh wrote: »

Phased drawdown could be the answer to that as you only part crystallise periodically.

Agreed and already mentioned, but the idea seemed a bit complicated for wolverine.As a recipient of IB (taxable, I believe?) some permutation of either living off the TFC until benefits are overcome by state pension, or phased drawdown (which may achieve the same thing or close to it) would no doubt be best.

We really need to know more about his circs.Has his IFA looked at the benefits/taxable income issue?

hoylakeq

Dear Ed,

I don't normally comment on this site but for the record I am an IFA who regularly uses low cost online SIPPs to manage clients drawdown funds and will (have) recommend ETF's/Trackers etc., where appropriate.

For the majority of clients in drawdown it's important to manage expectations and ensure the income they take does not exceed the income the fund generates. This is best achieved via low cost SIPPs and ETF's / Trackers and some more specialist funds and not via an insurance company manged fund.

I happen to think the advice regarding drawdown in this instance is poor at best, but please don't tar as all with the same brush. Based on my experience there is nowhere near enough information available on this thread to establish any sensible recommendations.

Quentin McCormick CFP

whiteflag_3

hoylakeq wrote: »

This is best achieved via low cost SIPPs and ETF's / Trackers and some more specialist funds and not via an insurance company manged fund.

Thanks for that Quentin- Im really interested in your findings, so could you possibly provide a link to the stats that prove this. Any information would be greatly appreciated.

Also interested how you make money- what do you charge for setting up a low cost SIPP?

EdInvestor

hoylakeq wrote: »

I don't normally comment on this site but for the record I am an IFA who regularly uses low cost online SIPPs to manage clients drawdown funds and will (have) recommend ETF's/Trackers etc., where appropriate.

Pleae to hear it.:)

For the majority of clients in drawdown it's important to manage expectations and ensure the income they take does not exceed the income the fund generates.

An alternative is to take the full amount out allowed under the GAD limits and reinvest the extra in a tax free environment so that income taken later is tax free and the money is available immediately if needed.. This is IMHO less risky than leaving the money in the regulated pension/drawdown environment.

This is best achieved via low cost SIPPs and ETF's / Trackers and some more specialist funds and not via an insurance company manged fund.

.Agreed.A diversified portfolio of shares paying decent divis will also be a useful low cost component of a drawdown.