Income drawdown vs annuity purchase at retirement

dunstonh

EnglishSaver wrote: »

I have a 50K pot and am looking to invest in an annuity, what questions should i be asking ? I'm healthy and own my property!

visit unbiased.co.uk and pick a local IFA. They will ask you the questions and discuss the options as well as find the providers that suit what you need.

Most providers either don't retail direct to public or don't offer their best terms (IFAs dominate the distribution with over 75% of the market - they get the best terms).

AlTcher

Hello all. I'm a journalist looking for people to take part in a group study about annuities for a current affairs TV programme.

Participants need to be over the age of 55 and have an untouched pension. Filming will take place in Central London over the next week.

This isn't spam, I'm a real person, I'll be here following the thread all day so drop me a line if you're interested to find out more.

Best, Alex

taurustime

Purely by chance, in 2008, I started drawing down a pension at age 59 in order to access the 25% cash free sum to put towards a deposit on my flat. I had to start taking drawdown which I did at the maximum rate of 5%. More recently, a small pension reached maturity at 65 and I was compelled to transfer it to an annuity. The income from my first larger pension is far more in PERCENTAGE terms than the income I was offered on the annuity. Indeed, it was only by searching around that I managed to obtain an annuity payment level AFTER 20% BR Tax deduction than I was offered by my provider BEFORE BR Tax deduction. Had I taken the first annuity offer, I would have received the pre-tax sum that I am now receiving post tax, so 20% worse off. My advice to anyone would be to start drawing down your pension around 10-15 years BEFORE its 'maturity to annuity' date. Even with the 5-year reviews, which are compulsory by HMRC in order to prevent you making yourself intentionally 'poor', the monthly payments you will get from drawdown will far exceed the derisory payments you will get from an annuity.

Linton

taurustime wrote: »

Purely by chance, in 2008, I started drawing down a pension at age 59 in order to access the 25% cash free sum to put towards a deposit on my flat. I had to start taking drawdown which I did at the maximum rate of 5%. More recently, a small pension reached maturity at 65 and I was compelled to transfer it to an annuity. The income from my first larger pension is far more in PERCENTAGE terms than the income I was offered on the annuity. Indeed, it was only by searching around that I managed to obtain an annuity payment level AFTER 20% BR Tax deduction than I was offered by my provider BEFORE BR Tax deduction. Had I taken the first annuity offer, I would have received the pre-tax sum that I am now receiving post tax, so 20% worse off. My advice to anyone would be to start drawing down your pension around 10-15 years BEFORE its 'maturity to annuity' date. Even with the 5-year reviews, which are compulsory by HMRC in order to prevent you making yourself intentionally 'poor', the monthly payments you will get from drawdown will far exceed the derisory payments you will get from an annuity.

Are you comparing like with like? I thought the GAD rate was a bit less than the rate for a non-inflation matching annuity, but much better than that for an inflation linked annuity. With equity investment the drawdown return can be expected to be at least broadly inflation matching but this is far from being guaranteed.

jamesd

At the moment GAD is 7.32% at age 65, that's with a 3.25% gilt yield. With a more normal 4.5% gilt yield it'd be 8.4% at 65, 6.96% at 55.

You might be thinking of the particularly adverse combination of 100% instead of 120% GAD multiplier combined with 2% gilt yield from mid 2012, when the cap was around 5.3% at 65. But even that's good compared to an annuity purchase because it's not fixed for life, just until the next calculation.

bmm78

taurustime wrote: »

Purely by chance, in 2008, I started drawing down a pension at age 59 in order to access the 25% cash free sum to put towards a deposit on my flat. I had to start taking drawdown which I did at the maximum rate of 5%. More recently, a small pension reached maturity at 65 and I was compelled to transfer it to an annuity. The income from my first larger pension is far more in PERCENTAGE terms than the income I was offered on the annuity. Indeed, it was only by searching around that I managed to obtain an annuity payment level AFTER 20% BR Tax deduction than I was offered by my provider BEFORE BR Tax deduction. Had I taken the first annuity offer, I would have received the pre-tax sum that I am now receiving post tax, so 20% worse off. My advice to anyone would be to start drawing down your pension around 10-15 years BEFORE its 'maturity to annuity' date. Even with the 5-year reviews, which are compulsory by HMRC in order to prevent you making yourself intentionally 'poor', the monthly payments you will get from drawdown will far exceed the derisory payments you will get from an annuity.

It's very much comparing apples and oranges, and even then only looking at half the story. It's not just about the income you can get now - you have to consider what the income could be in the long term. Annuities are an insurance product rather than a high income product (especially these days).

Particularly with 120% GAD, you can almost certainly get more income from drawdown initially. It may or may not be sustainable though, depending on how long you live.

It's equally as misleading to say that Drawdown>Annuities as it is to say that Annuities are better than Drawdown.

Annuities are a relatively attractive product if you outlive your mortality, or more to the point if you fear running out of pension money more than you fear not getting the whole amount back in your lifetime.

philng

Looking around for most cost effective SIPP option for a sum of around £50k-Long story but wife has option to retire aged 54 under scheme rules & due to work stress unlikely to be able to continue work until 55th birthday next July.
Have no real need for income at present due to other investment income & my earnings but reluctant to accept low annuity offer so considering SIPP & future Income Drawdown as alternative.
Provider options would be appreciated? I know the costs vary alot.

newborn

I am 55 my pot is 240k I need to take 25% what should I do with the 180k annuity or drawdown?

jamesd

newborn, at 55 annuities are particularly bad value. Have a read of Pension calculation help to get me to 25k pa for some thoughts on this.

Why do you need to take the 25%? Not for something like paying off a mortgage at say 3% mortgage interest rate, I hope?

newborn

I'm looking to reinvesting the pension annuity into a new pension with a view to drawing down at 65
I would like the cash now to enjoy life while I am young enough to do so