Income drawdown vs annuity purchase at retirement

oceanblue_3

Reportinvestor, one of the most interesting features of this chat forum is the fact that it allows people from diverse backgrounds the opportunity to express and discuss opinions concerning one of life's fundamental problems: "how do I pay for things once I have stopped working?"

As a professional adviser, a good deal of my time is spent helping my clients find a solution to this problem. In addition, I am more than willing to offer my time in helping subscribers to the MSE website find their own solutions. This is not an easy task, I know, but if people feel a little more reassured by reading what subscribers write, then we're making progress.

However, when a regular contributor to this forum posts an absolutely incorrect statement such as....

"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"

..........and then doesn't acknowledge his error, but suggests that qualified advisers are distorting figures, then I have doubts about his true motives.

What Edinvestor posted was inaccurate and misleading, and I think he should acknowledge that he was wrong.

EdInvestor

Dear me here's yet another estimate from another adviser.

CapitaPPML calculator


So now we have three:

1.William Burrows: 7,000
2.Capita: 6,000
3.Oceanblue: 5,800


I wonder which adviser is correct?

My money's on No 2.

Of course, they are all higher than the annuity rate, and you get to keep your capital as well, which is the main thing people coming up to retirement need to know.

dunstonh

Seeing as the difference between 2 & 3 is so small as to make very little difference, you have to consider them both correct. There will always be small differences. Also, once something is in print, its out of date. Things change daily and the figures will move around a bit because of that.

Of course, they are all higher than the annuity rate, and you get to keep your capital as well, which is the main thing people coming up to retirement need to know.

Higher than in first year. The annuity would be increasing annually by inflation and would surpass the drawdown income at some point.

Indeed, looking to next year, if you want the ASI, its something like 70% of the level annuity figure will be allowed to be withdrawn. That would put it on par with the index linked annuity in year one.

I'm not sure what reportinvestor is on about there. It appears that when the industry professionals on the board are trying to make sure that all aspects of risk are given, some dislike that. Surely its important to give a balanced discussion covering all things. Eds posts for example are not wrong in their idea, they just happen to omit certain important things which would put a number of people off or they do not quite compare like for like giving a more biased slant towards one option.

oceanblue_3

Edinvestor says......"which is the main thing people coming up to retirement need to know."

You are absolutely correct: everybody needs accurate information if they are to make good decisions.

The fact is that you provided inaccurate information by saying that a 55-year-old woman could receive £7,000.00 in drawdown.

What is more alarming, however, is that you don't know WHY your information was wrong - you don't know HOW drawdown works, yet you continue to promote it as the product of choice for the majority of posters.

The information I provided WAS accurate at the time I posted it. Since then, the Government Actuary's Department (GAD) has advised the professional community that the relevant yield to be used has increased to 4.25% (based on the figures published in the Financial Times on 15/06/2005). As a result of this, our 55-year-old woman is now permitted to take a maximium of 6% of her fund as annual, taxable, income. This where the sum of £6,000.00 comes from.

By contrast, a conventional annuity would now pay an annual taxable income of £5,696.00 on normal rates, £5,929.00 on enhanced (smokers') rates, and £7,623.00 on impaired (reduced life expectancy rates).

You are wrong to suggest that drawdown will ALWAYS provide better rates than annuities - the details of the preceding paragraph demonstrate this. Furthermore, market conditions and the GAD tables sometimes conspire against drawdown rates and create a better deal from conventional annuities.

In addition, you are being disingenuous when you suggest that drawdown allows people to pass their pension "capital" on to their surviving families. In theory, it does. In reality, most people currently in drawdown are faced with a dilemma in their late-60's: should they now purchase conventional annuities which are currently providing over 6%, with full reversion to a surviving spouse, or should they continue to take the risk of now achieving a yield of over 7% (including charges) in drawdown.

Clearly, we expect the rules to change in April 2006, and these rules will enable people in drawdown to defer the purchase of an annuity indefinitely, even beyond the age of 75. However, if this route is chosen, then the maximum income allowed in drawdown is 70% of the conventional annuity available to a 75-year-old. This could be significantly less than income received via drawdown at age 74!

I would suggest that, at this point, most retired people will be actuated more by the desire to secure the highest income possible for themselves and their spouses than by the desire to leave more capital to their children and grandchildren. We can see this trend already in the growing popularity of equity release with older people: this, too, will restrict the amount of capital capable of being passed down to younger members of the family, yet it continues to fire the imagination of the house-owning public.

As usual, Edinvestor, you continue to demonstrate that "a little knowledge is a dangerous thing". You have a worryingly limited understanding of how these products work and, more significantly, you have no real awareness of how they interact with the people for whom they are intended.

EdInvestor

Interested folk can check the Treasury 15 year gilt yield here

It appears to get updated by the GAD at the end of the month,is that correct oceanblue?

IMHO it also needs to be emphasised that if you decide to try drawdown,and later don't feel compfortable with it for whatever reason, then you can always buy an annuity.

Whereas if you buy an annuity at the start, there is no going back (unless you've been mis-sold of course).

Our 55 year old in drawdown might receive only 6000, compared with £7,623.00 on impaired life (reduced life expectancy rates), but if she dies young, as she would clearly be expecting to do, her fund is returned to her spouse/heirs minus a 35k tax charge, whereas with the annuity they would get nothing.

Drawdown should always be considered by people in ill health with significantly reduced life expectancy.

oceanblue_3

Edinvestor says..."It appears to get updated by the GAD at the end of the month,is that correct oceanblue?"

That's not quite how it works. The figure used is that published in the Financial Times on the 15th of the month preceding the month in which the calculation is made (the reference date).

From August 1st 2005, the gross redemption yield of long-dated (15-year plus) government stock published on 15th July 2005 will be used. This is then rounded-down to the nearest 0.25%.

The GAD tables http://www.gad.gov.uk/Publications/...es_9May2005.pdf are then used to determine the maximum income allowed according to age and gender.

Edinvestor also says.."IMHO it also needs to be emphasised that if you decide to try drawdown,and later don't feel compfortable with it for whatever reason, then you can always buy an annuity."

What if the reason for the change of mind is falling capital values? The person concerned would then have a smaller fund with which to buy a conventional annuity. The fact that you could change your mind, but end up with a smaller income, would be poor consolation for most I should imagine.

Edinvestor says.."Drawdown should always be considered by people in ill health with significantly reduced life expectancy."

Wrong again!! People in this situation would be better advised to follow one of two routes:

1) if there is an alternative source of income, leave the pension fund invested. The payment on death before age 75 would be the entire value of the fund;

2) if there is no alternative source of income, then PHASED drwadown would be more flexible and, potentially, beneficial. In this situation, the unvested fund would be returned in its entirety, with a 35% charge applying only to the vested portion.

EdInvestor

Blimey OB, you do split hairs !

For any poor Moneysaver who's actually got this far and doesn't want to have to deal with this situation when they get old, here's a piece of advice:

When saving for your old age, max out your ISAs first.

oceanblue_3

Edinvestor says.."Blimey OB, you do split hairs."

Well, Edinvestor, that is the difference between a professional and an amateur - I know what I'm talking about, you don't; I've done the hard yards to get the qualifications, you haven't; I have the experience and the insights, you have the bluster and the near-misses; I save my clients money, you posture and go ego-tripping.........

Pal

Lets calm down on the "insults" a bit.

I think I might stick this thread for a while.

oceanblue_3

Edinvestor says.."For any poor Moneysaver who's actually got this far and doesn't want to have to deal with this situation when they get old, here's a piece of advice:

When saving for your old age, max out your ISAs first."

Edinvestor, I'm guessing that the somewhat imprecise nature of this "advice" has been precipitated by the inadequacy you now feel having been confronted by your own shortcomings.

If, on the other hand, your "advice" has been carefully considered and rigorously "field-tested", perhaps you could explain how it would provide, for all Moneysavers, the peace of mind we all seek.