Income drawdown vs annuity purchase at retirement

DavidLaGuardia

oceanblue wrote:

David - some excellent points.

There is also the danger of negative, or reverse, pound-cost averaging when taking income from a drawdown arrangement.

As you know, this works in much the same way as pound-cost averaging, but is capable of ravaging the value of the fund should withdrawals be made in a falling equity/gilt/coporate bond/property market.

I don't think the dark side have quite assimilated this concept!

Thank you. Just to clarify though, this is the more or less point I made in the original message. There is not really such a thing as reverse or negative pound cost averaging. While it reduces the risk for buyer and seller, its other effect takes place in any fluctuating market, whether or not the overall trend is up or down. It is an advantage to the buyer and a disadvantage to the seller relative to the average price over the period. Admittedly a downward is even worse for the seller but this is the compouding effect of loss in value rather than PCA

EdInvestor

This is not relevant if you are taking income in the form of dividends - as the many millions of owners of privatisation and demutualisation shares will be aware.

dunstonh

And those shares can go down as well as up as many millions of owners of privatisation and demutualisation shares will be aware.

ReportInvestor

When discussing shares for retirement income, it is important not to confuse [capital] volatility with [income] risk.

EdInvestor

I am talking about taking income from dividends.This idea seems to be very difficult for some people to grasp. It doesn't matter if the capital value of the fund fluctuates ( as it will) if the dividends are stable.Generally they are - much more so than cash.If you pick the relevant companies to invest in, they also rise over time.

oceanblue_3

Reportinvestor says.."When discussing shares for retirement income, it is important not to confuse [capital] volatility with [income] risk."

This is a very important point to make; however, there is a degree of confusion in your thinking here: the foundation for the argument that both you and Edinvestor make in respect of Drawdown is the ability, possibly, to pass on pension "capital" to future generations.

If you are now conceding that this value is susceptible to market volatility, surely you must admit that your foundations are creaking a little.....

Edinvestor says.."I am talking about taking income from dividends.This idea seems to be very difficult for some people to grasp. It doesn't matter if the capital value of the fund fluctuates ( as it will) if the dividends are stable.Generally they are - much more so than cash.If you pick the relevant companies to invest in, they also rise over time."

Again, the logic here is somewhat flawed: there is an inescapable direct correlation between trading conditions, earnings, share values, and dividends paid. There are few companies whose dividends remain stable in the face of falling equity markets; the more circumscribed you make this universe of shares from which to choose, the more potential damage you are likely to inflict on the long-term viability of your Drawdown fund.

whiteflag_3

Been away for 2 weeks and surprised that despite some really good points being made by oceanblue, david LaGuardia etc that this is thread is still dragging on. Had hoped to see admission by certain parties that either option can be right in the correct circumstances the right person along with acceptance that drawdown can be risky for the inexperienced investor.

oh well here goes!

Edinvesor writes

I am talking about taking income from dividends.This idea seems to be very difficult for some people to grasp.

Isnt this why drawdown should not be entered into by inexperienced investors?

It doesn't matter if the capital value of the fund fluctuates ( as it will) if the dividends are stable.

True , it shouldnt matter, however unless you investors fully understand this I wouldnt be surprised that they end up panicking and end up selling at exactly the wrong time. Also I think many retired people would be more comfortable with certainty of income much the same as during their working life. Dont need to tell you only one option can guarantee this.

Generally they are - much more so than cash.If you pick the relevant companies to invest in, they also rise over time.

So are you telling potential drawdown investors reading this that all you need to do is pick the right shares and they will rise over time? This seems very dangerous. However if a list of "relevant" shares can be supplied I and not doubt many others will be very greatfull.

EdInvestor

Hello whiteflag,

The type of investment I'm talking about is similar to an equity income fund, but without the charges. It might be complemented in a drawdown by a commercial property quoted shares/trusts, which are similar to the funds run by the big insurers, which would further boost the yield.

Of course for inexperienced investors you would take it gently, step by step while they get used to it. Cash and/or gilts might well occupy the biggest portion of the drawdown at first, with a small chunk in the type of equities I'm taking about;after all a typical IFA package of annuity+investment bond puts almost 20% of the person's money into equities from the start - and that's at a higher risk level than I'm talking about.

Of course the investment of the drawdown can be changed any time within the SIPP, so if an investor does panic, it's not a problem, he can just switch into cash and watch what happens for a bit while still earning interest.IMHO it's very important that the investor understands what's going on right from the start and eventually learns how to manage it all for himself.

Of course I do imagine that industry personnell will view this idea with horror as it certainly doesn't include any allowance for the services of an IFA or charges for funds. But it's not really aimed at your clientele, who will be mainly significantly better off.

Rather it will be helpful for the people who are now scatching around for enough retirement money because their WP pensions haven't performed, their endowment has a shortfall and/or annuity rates have halved - or because they have been forcibly retired in their mid 50s because they can't get another job.

dunstonh

Of course I do imagine that industry personnell will view this idea with horror as it certainly doesn't include any allowance for the services of an IFA or charges for funds. But it's not really aimed at your clientele, who will be mainly significantly better off.

The mainly significantly better off are more likely to seek advice because they will have a range of issues. They are also more likely to pay for advice rather than by commission. I believe you are more likely referring to the daily mail money readers who are unlikely to seek advice because they believe they can do it themselves.

Thats fine if they want to do it. However, the whole crux of these threads has been risk and the lack of information about that risk when drawdown suggestions have been made.

Rather it will be helpful for the people who are now scatching around for enough retirement money because their WP pensions haven't performed, their endowment has a shortfall and/or annuity rates have halved - or because they have been forcibly retired in their mid 50s because they can't get another job.

Someone with an endowment shortfall is unlikely to consider shortfall. They have already seen the endowment fall short, are they likely to consider the same happening with their retirement income? You also assume with profits pensions are bad. That is not necessarily the case with all WP funds.

Also, drawdown doesnt necessarily mean they will not purchase an annuity in the end. Therefore capital value can be important. They could end up with 70% or the annuity income at the start and find their capital has dwindled down leaving them no better off when if and when they do decide to buy an annuity at 75 (or whatever).

oceanblue_3

Edinvestor says "Of course I do imagine that industry personnell will view this idea with horror as it certainly doesn't include any allowance for the services of an IFA or charges for funds. But it's not really aimed at your clientele, who will be mainly significantly better off."

Very busy today, so can deal with only a very small portion of this recent post.

This is nonsense......whether the work is done by another adviser or by the client him/herself, the important thing is that the job is done properly....and then monitored by a competent person.

If you were to have any regard at all for the Regulator's opinion concerning Pension Fund Income Withdrawal, you would know that the product is aimed at people who have access to other sources of income, such is the inherent risk involved.

You seem to be suggesting that your version of PFIW, reliant as it is upon constant monitoring, and nimble, timely asset allocation, is most appropriate for those who have little else to fall back on. Edinvestor, this is an innovative and radical approach, and I need time to consider its ramifications...................