Income drawdown vs annuity purchase at retirement

LeanneS_2

Regarding your annuity, there's a great service at Key Retirement Solutions where they shop around for you! They find you the best deal and don't charge for their service.

Gracchus_Babeuf

Drawdown is a good idea for a limited period of time, I would say up to 5 years. After that, there is a big risk that the fund will diminish to vanishing point, so an annuity is ultimately pretty much an inevitable option. I'm planning to retire at 65 and draw down until maybe 70, then buy an annuity with the remaining pot. With the state pension not kicking in for me until age 67 (and it might yet rise) it would make no sense for me to buy an annuity at 65 - best to wait until the arrival of the state pension can smooth over my cashflow.

jamesd

There's no need for the fund to diminish hugely. The rate at which you can take money out is capped by the GAD limit and you can choose investments with a low chance of falling in market drops if you like. Even gilts if you want to try to match annuity returns with as much security as th UK government offers.

If the gilt yield is 4.5% the maximum you could take out a year from a £1,000 pension pot would be set by the GAD limit at £70 for a 65 year old man, increasing to £79 at 70.

So say you lost 30% in the markets and still drew at the maximum permitted rate for three years you'd still have 49% left, then the GAD limit would be decreased to about £36 a year for the next thee years. If no more market losses taking at that maximum rate would leave you with £402 and the next calculation would limit you to about £32 a year, at which point you'd be 74 and still have £306 left.

That ignores investment gains and investment income, just takes a substantial loss at the start with no recovery and taking the maximum possible income anyway. If you were getting 5% income you'd have £537 left, not £306, and any market recovery would help a lot more, as would adjusting income level voluntarily.

You do need to consider and manage these risks with drawdown, though.

Age 75 is where annuities can start to pay out more than drawdown due to the cross-subsidy of survivors by those who die earlier growing more rapidly around then. It still might not be desirable because annuities have worse inheritance properties than drawdown and possibly worse survivor's benefits for a spouse.

christiehartshorn

An annuity is a lifetime contract and cannot be changed once started. For example if annuity rates increase you cannot get a better deal. If you are close to the age 70 or more then annuity rates are likely to be favourable for most people. While, Income drawdown offers younger clients in particular more options in retirement and the chance to see their money grow even after they have retired.

jamesd

Annuities are not necessarily lifetime contracts, though the mot commonly used retirement annuities are lifetime annuities. Within a pension and outside a pension term annuities are available for those who have a use for them.

It is not true that annuity rates are likely to be favourable for people close to the age of 70 or more in the UK. That doesn't arise until sometime after age 75 unless there are also factors reducing life expectancy. Until then, income drawdown is likely to be most favourable.

I see that you're located in the United States and appear to be describing products for the US market on your web site. Perhaps you gave a figure that applies to that market, not considering the applicable market and alternatives to annuities for participants here, who are in the UK?

Pokesdown

I am 64 and have pensions which my ifa advises to be put into a drawdown system. The pension is not due to mature till 2013actually, but I can take it now. His fees were not discussed, but I have found he will be receiving trail commission. What percentage of my pension would he be receiving. How does it work? He has advised me that this would be the best rather than annuity. I do have a health problem.

dunstonh

His fees were not discussed, but I have found he will be receiving trail commission

Which is quite normal on drawdown as it requires reviews.

What percentage of my pension would he be receiving.

Whatever you agree with him

How does it work?

You will need to ask the IFA about things that are specific to you.

He has advised me that this would be the best rather than annuity.

There are pros and cons of both options. Some people wont go near drawdown. Whilst others wont go near annuity. There is no right or wrong on the options other than what is right for you.

smiler2

Some interesting stuff in this thread, Given current legislation some of the advice is no longer relevant.

I am not sure which way to jump, I am 56 and retired and receive a defined Benefit company pension of more than £20k, no debt or mortgage.
I also am still working, get a salary and am deep in 40% tax band so I put £50k pa of my 40% taxed income in a HL SIPP as cash that earns a small 1.8% pa tax free.

I have other assets in:
1. Cash ISA I put in the £5k max a year
2. Self select shares ISA I increase by the £5k max a year.
3. A Regular share portfolio I drain £10k a year off of to use my CGT allowance up, that grows more than £10k pa normally.
4. SIPP with 100k, I will continue to put in the max £50k pa allowed until I decide to stop working or my contract ends.
So I guess my assets are pretty spread around, as is good practice, but the SIPP is not so clear.

My idea was to keep my HL Vantage SIPP as cash as I have plenty of equity exposure and use it as an IVPP, but with this new £20k pension rule I could do income drawdown with no restrictions.
I just will pay 20% tax on what I drawdown.
The only problem is if I start flexible drawdown the rules say I cannot contribute any more to a pension and get tax relief, ever.

I want to completely retire before age 60, so two choices

Annuity (done like an IVPP)

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£100k in HL Vantage SIPP, cost me £60k +£40k tax relief, take £25k cash tax free.
Leaves £75k for an annuity with a net cost of £60k-£25k=£35k
So for a £35k net cost I have an annuity of £75k
Level 10yr guarantee annuity I get 5% now at age 56 on £75k = £3.75k pa
As annuity cost me £35k, effective return is 3.75/35 = 10.7%
After 20% basic tax, annuity effective net return is 8.5%

Continue each year until I stop working, really retire by adding £50k pa gross to the SIPP with 40% tax relief and turn into an annuity each year as above.

Drawdown

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Same £100k start point in cash earning 1.8% pa in my HL SIPP
Move SIPP from cash to cheap tracker ?? or bond ?? to grow ??
Keep adding £50k pa to the SIPP untill I stop work
when I really retire. take 25% tax free cash and flexible drawdown £10-20k pa to keep me under 40% income tax band

Drawdown appeals as I can get more of my cash out of my pension faster to spend/invest as I like and not lock into the current very low and going lower annuity rates.
The cash released I can do what I want with, spend or invest until I need it.
I do not really need annuity income right now as well.

Any of you people think what is my best option ? , Annuity or drawdown ?

jamesd

Your risk tolerance is a key factor. That's mixed, you use equities and you're also using a lot of cash in the SIPP. So am I at the moment so I'm not sure it's your actual risk tolerance to have so much cash. I think not given the share holdings.

Given the nice defined benefit income, drawdown looks like a pretty good move. At today's gilt yield you won't be able to take money out of a pension pot in drawdown faster than it'll grow from bonds or equities long term. But this is temporary and may have reverted back to a more normal level by the time it matters to you.

smiler2

Many thx for your comment, my risk profile is medium outside my SIPP and low risk for my SIPP. The cash SIPP only represents 25% of my assets, I am pumping up both cash and equities and aim for 40% cash.

I never tried funds as on average they seem like a way for fund mangers to make money and not their clients., self investing blue chip equities in UK and USA. I show a 10% return pa over the last 10 years.

I am also considering moving my HL cash SIPP to a sipp provider that gives me access to PIBS, Nationwide NABA or NABB @ about 8% yield. The bid offer spread on these things looks worrying though.