Income drawdown vs annuity purchase at retirement

oceanblue_3

..............done!

Edinvestor, I don't think it will work.

EdInvestor

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).


Very unlikely according to historical experience: dividends are much more stable than gilt yields or interest income.On the capital front, the shares I refer to are "defensive" and usually go down less at times of market falls and recover more rapidly, as you can see from the performance of equity income funds.

There will be no need to buy an annuity at 75 from next April, you can just hand the fund on to your children in the family SIPP when you die and they can in turn use it for their pension later

EdInvestor

oceanblue wrote:

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.

Where did I mention "constant monitoring" and "nimble timely asset allocation"?

Like many of your posts OB, you just made that up.


Neither is required.

oceanblue_3

Edinvestor says.."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;
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."

That sounds like high maintenance to me - the sort of attention that most retired people would be unwilling to tolerate. Are you really saying that retired people with modest pension funds, who have suffered with underperforming endowment policies, and have limited access to alternative sources of income are going to engage in this type of activity?

Edinvestor, I have not made up any of my posts; if fact, you have often acknowledged the value of the points I have made. Sadly, I have to say, I am not surprised by the alacrity which characterises your willingness to make such insidious comments.

whiteflag_3

Edinvestor writes

There will be no need to buy an annuity at 75 from next April, you can just hand the fund on to your children in the family SIPP when you die and they can in turn use it for their pension later

Anyone know if this will be free from inheritance tax?

oceanblue_3

Hello Whiteflag

The Government has asked the Inland Revenue to look into this matter but, as far as I know, a decision has not yet been made.

This lump sum would be available in post-75 drawdown, assuming the member left no spouse or dependants. One significant fact is that any residue left to a registered charity will be exempt from IHT.

It assumes also that the potential recipients are in the same pension scheme (similar to a current SSAS or SIPP).

However, the inheritance tax treatment of this Transfer Lump Sum Death Benefit has yet to be decided, and advisers are not at liberty to suggest that it will be exempt from IHT.

whiteflag_3

Ive done some research and found this on the HMRC website which is very interesting!

Looks to me that IHT will be payable on pension funds that go beyond 75

Heres the link

http://www.hmrc.gov.uk/consult_new/dis-paper-inh-tax.pdf

This may add a new angle to the discussion!!!!

ReportInvestor

It has a bearing on the issue, wf. I don't find it surprising that the government will take a cut else it would lose any redistributive credentials.

oceanblue wrote:

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.

That's not the most logical argument that you have put forward, ob. It is obviously a risk factor in the equation, but no-one suggested that it was a requirement of the case for drawdown to pass on all of the estate at retirement. Drawdown investors would hoping to pass on more , but we all know that markets can fall as well as rise. I'm sure, on balance, that you tell your clients that they are likely to rise over ten years :rolleyes:.

Let's assume our potential pension investor has a house and other assets already above the £275K current IHT level and has a £200K pension pot. As soon as (s)he invests in an annuity then the heirs are immediately deprived of all of the £200K. If it is drawdown they stand to get £120K. Even if the capital in the drawdown portfolio fell 40% [and not all the portfolio would be in shares] we are still talking of a an extra £78K added to the post tax estate. That's a significant sum.

If the house and other assets are below the £275K IHT tax free limit then the figure would be higher.

Your case against drawdown rests on income adequacy and income risk, not the point you made above.

Whatever the government may eventually decide on the taxation of ASPs after age 75, it is highly unlikely that they will take more than 40%. The inheritance issue is about whether you want to give 0% or 60% of any surplus over £275K to your heirs. And a bit of capital fluctuation doesn't change that fundamental point.

oceanblue_3

Reportinvestor says.."Your case against drawdown rests on income adequacy and income risk, not the point you made above."

Believe me, I have no case against drawdown - it is highly likely that I shall choose to
follow that course. My concern is to attempt to redress the balance when comments like these are made....

"There will be no need to buy an annuity at 75 from next April, you can just hand the fund on to your children in the family SIPP when you die and they can in turn use it for their pension later."

What some people don't appear to have appreciated is that, with intangible products such as pension and investments, there is an almost overwhelming desire for the inexperienced customer to look for simplicity, and to polarise towards a quick decision. Glib statements like the one above are likely to lead to inexperienced investors making rash decisions.

EdInvestor

.. with intangible products such as pension and investments, there is an almost overwhelming desire for the inexperienced customer to look for simplicity, and to polarise towards a quick decision. Glib statements like the one above are likely to lead to inexperienced investors making rash decisions.

In that case OB, it is even more important to stress the advantages of drawdown to the investor as something that may be worth trying first, so as to avoid a rush into a possibly rash and irrevocable decision of giving up all all their capital and buying an annuity.

If it is found to be unsuitable, a drawdown can be converted into an annuity later.But once you've bought an annuity, that's it, you've had it, there's no going back.

Investors be warned.

.