Income drawdown vs annuity purchase at retirement

oceanblue_3

Edinvestor, you sound like a politician.............when challenged, in the absence of knowledge and of experience, you resort to invective.
Are you going to show us how to draw down the £7,000.00? Or shall we assume that you don't know what you're talking about?

EdInvestor

People can access the website link to see what income they can get, it's always more than an annuity but obviously fluctuates.More important is to know how to invest the fund IMHO - aim for 5-6% income at first. If you just take the income the capital can grow and your income can rise in future. You can of course also dip into the capital if you want to.


This thread may help a little

oceanblue_3

Edinvestor says this........"Thus, if we take a 55 year old woman with a 100k pension fund, under drawdown she would be able to take an annual income of 7,000 quid, compared with the best current rate of 5,640 if she spent all her capital on an annuity."

Since you are unwilling, or unable, to perform the calculation yourself, let me assist you..........assuming a current gross redemption yield of 4.21% on 15 -year gilts, and rounding that down to the nearest 0.25%, a 55-year-old woman would be allowed a maximum annual income of £5,800.00 NOT £7,000.00.

The difference between £5,640.00 for a conventional annuity, and £5,800.00 using drawdown is not that great - it's certainly nowhere near the £7,000.00 you used as a foundation for your argument.

As I suspected, the website you referred to offers illustrations for guidance only, and is quoting an out-of-date yield of 4.75%.

Let's face it, Edinvestor, you're an enthusiastic, if somewhat misguided amateur. To be frank, I have grave reservations about your ability to understand the concepts involved in this particular area of financial planning.

EdInvestor

Whichever way you want to twist it, you still get more income with drawdown and keep your capital, instead of having it taken by the insurance company.

I do suggest anyone considering drawdown should consult either a specialist IFA such as William Burroughs or the Annuity Bureau's special unit - or one of the SIPP providers, as your fund will have to be moved to a SIPP first.

These specialists are likely to be more helpful on how to go about drawdown than ordinary IFAs who are much more focussed on selling insurance company products.In general, income drawdown is not an insurance company product, a fact which some investors might consider to be an advantage

dunstonh

Whichever way you want to twist it, you still get more income with drawdown and keep your capital, instead of having it taken by the insurance company.

A statement like that would put you in breach of compliance and if you had told a client that, you would be liable for mis-sale.

These specialists are likely to be more helpful on how to go about drawdown than ordinary IFAs who are much more focussed on selling insurance company products

That is complete rubbish. You are assuming that an annuity would be the IFAs choice as they earn more from it. However, drawdown earns the IFA significantly more than an annuity purchase. Trying to bring earnings into it to justify your arguement is inappropriate and as drawdown pays more, its also flawed.

You also seem to be missing the whole point.

Drawdown is high risk. Everyone except you says that. Drawdown can give you more, it can also give you less. It can give significantly more and it can give significantly less. If you accept that risk, fine. If you do not accept that risk, then annuity is the most suitable option.

whiteflag_3

edinvestor writes

as your fund will have to be moved to a SIPP first.

:rolleyes:

Why?

also

In general, income drawdown is not an insurance company product, a fact which some investors might consider to be an advantage

Can you tell us who are the main income drawdown providers are in UK?

Don't insurance based providers offer as good value as "specialist" providers?

EdInvestor

You are assuming that an annuity would be the IFAs choice as they earn more from it.

Not at all. I am assuming that the IFA will earn 1% from the annuity sale, and the insurer will charge an extra 4% to cover the costs of investing the annuitant's own money (which the insurer now owns) and then paying it back to him as an income.

The IFA is more likely to benefit from the associated product in the typical retirement package - the investment bond.This product, designed to scoop up the tax free cash element is invested in the very same allegedly risky assets as are deemed completely inappropriate for the main fund.This product pays the IFA a commission of up to 7% and is hedged around with high charges and penalties to protect the insurer against market falls and a change of mind by an investor who suddenly wakes up.

Drawdown will earn the IFA more if the investor chooses a high cost drawdown route. The IFA will earn zero if the investor chooses a low cost drawdown provider. The insurance company might make a bit in fees on the high cost route, zero on the low cost route.

Drawdown is high risk

OK, let's discuss the risks - and the rewards. What exactly do you see as the main ones?

dunstonh

Not at all. I am assuming that the IFA will earn 1% from the annuity sale, and the insurer will charge an extra 4% to cover the costs of investing the annuitant's own money (which the insurer now owns) and then paying it back to him as an income.

You cannot assume a charge on the annuity sale. You have to look at the rate offered and nothing else. That rate is what the consumer gets and that is the only important thing.

In the same way that the savings rate offered by a bank is the only important thing. The fact that one bank may earn more than another on a savings account is not important.

The IFA is more likely to benefit from the associated product in the typical retirement package - the investment bond.This product, designed to scoop up the tax free cash element is invested in the very same allegedly risky assets as are deemed completely inappropriate for the main fund.This product pays the IFA a commission of up to 7% and is hedged around with high charges and penalties to protect the insurer against market falls and a change of mind by an investor who suddenly wakes up.

More rubbish. Investment bonds offer a massive range of investment funds nowadays. Most re-invest in the Unit trust fund equivalent. The charging structure on bonds over 10 years is often a lot lower than unit trusts. Indeed, over 5 years, it is quite easy to get a negative reduction in yield. Something you cannot achieve on a unit trust.

OK, let's discuss the risks - and the rewards. What exactly do you see as the main ones?

Why? You seem to have a complete disregard for investment risk. You have the assumption that things will always go up.

You also have limited knowledge and understanding of investment tax wrappers. Much of the information you do have is stereotypical and out of date.

No matter how many times you are corrected, you continue to repeat the same things.

Pal

dunstonh wrote:

You seem to have a complete disregard for investment risk. You have the assumption that things will always go up.

My main concern about the pro-SIPP/Drawdown posters is that they show a complete lack of understanding for how risk adverse most people are when they are approaching retirement. This is usually because of a lack of investment knowledge but I have seen investment professionals choosing annuities when retiring because of the security of income it provides. Even people who are willing to take investment risks while working suddenly become very risk adverse when their working life is coming to an end and their pension scheme is their main source of income.

EdInvestor

Pal

I'm not sure how old you are. But people coming up to retirement these days, because they lived through the 70s and 80s, are aware that the guarantee of an annuity that you will "not run out of money" does not really stand up to close scrutiny, because of inflation.

Even at current quite low levels, the value of the income from a level annuity will be cut in half over 20 years.There is no guarantee we will not have a major outbreak of double digit inflation again, is there?

The death of Ted Heath this week will remind many older people that inflation was over 20% for several years during his time.Just imagine what that does to a fixed income annuity.It doesn't bear thinking about.

What angers me is that people who have thought ahead in this way about the erosion of their income ( and particularly about what will happen to their wife after they die)are being taken advantage of by some advisors in the industry and exposed to sereious potential risks that they don't understand.:mad:

They are being sold investment-linked annuities, such as With profits annuities, under which they both lose their capital AND take both investment and company risk with an extremely opaque product.I think this is a disgrace, frankly.

With profits annuitants at Equitable Life have seen their income cut by 40% (so far) and they can neither transfer out, nor switch to a conventional annuity, nor claim for misselling on the basis they were not warned of the risks.

Nor can they dip into their capital to make up the shortfall, because they haven't got any capital any more, have they?

The system has totally failed these people IMHO, and no-one will take responsibility.

An annuity may be a part of a retirement package for many: I doubt it is the best way forward for the whole of most people's funds. In America (where drawdown is the normal system) the advice is that a maximum of 20-50% of a pension fund should be in a level annuity, the rest should be invested in assets which are likely to rise over time (ie in a drawdown invested in stocks and bonds).

"Serious" "experienced" and "sophisticated" investors ( that is, the ones who make money) will rarely if ever turn over all their capital to an insurance company for a (taxed) small income similar to bank interest which is not inflation protected.I would suggest that less experienced investors should try to find out why, and see if the answer applies to them as well.

You will be aware of course that many people have been campaigning against compulsory annuities for years, among them Opposition MPs who pushed several bills through parliament before the Government caved in, the Retirement Income Reform Campaign and CAPPA, the group campaigning against the "annuity trap".

For more info:

https://www.cappa.org.uk
https://www.rirc.org.uk

Oh and a note on the issue from the younger generation's point of view: do you really think it will be a good idea if this massive generation of babyboomers retiring now are all flogged annuities which will mean their income is cut in half in 20 years time and they will be dependant on the state?

How old will you be in 20 years time? Get ready for much higher taxes then, if these people aren't helped to maximise their investment opportunities now.