Income drawdown vs annuity purchase at retirement

oceanblue_3

Reportinvestor says.."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."

You're right; but at what cost to annual income would this be? Don't forget - the maximum amount of income in drawdown is 70% of the conventional annuity at age 75. I remain unconvinced that all, or most, 75-year-olds will elect to receive a pay cut.

Reportinvestor, I have no wish to perpetuate the confrontationl nature of the posts that has developed over the last few weeks. Neither I, nor, as far as I know, any of the other qualified advisers who post comments are doing so to generate business.

However, there is a wish, I am sure, to correct some of the inaccuracies posted by some, and to give an insight into the way these products work for real people. One person in particular has continued to post inaccurate and misleading statements regarding this subject; my sincere hope is that, as Pal has intimated, nobody is inclined to take her seriously.

dunstonh

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.

And when that fund goes down whilt under drawdown and they end up with a lower annuity than if they had gone with in the first case, who are they going to blame?

EdInvestor

oceanblue wrote:

Don't forget - the maximum amount of income in drawdown is 70% of the conventional annuity at age 75.

Not sure that this will be so, providers are suggesting that the way it will be calculated means it could be much the same as the income available with an annuity (rather than higher, as the drawdown offers now).In any case it's rather a long way off for those considering drawdown now.I'm sure many more changes will have taken place to modernise the retirement income system by then

DH

And when that fund goes down whilt under drawdown and they end up with a lower annuity than if they had gone with in the first case, who are they going to blame?

Why do you always assume the drawdown fund will go down? It's just as likely to go up.

oceanblue_3

Edinvestor says.."Not sure that this will be so, providers are suggesting that the way it will be calculated means it could be much the same as the income available with an annuity (rather than higher, as the drawdown offers now).In any case it's rather a long way off for those considering drawdown now.I'm sure many more changes will have taken place to modernise the retirement income system by then"

Well, I think I would rather follow what the Inland Revenue says - Schedule 28 of the Finance Act 2004 is unequivocal.

Perhaps you would like to share with us all the information you have gleaned from the providers.

Pal

I would also be facinated to hear what providers are currently "suggesting". Please post links to where they are suggesting this.
I am still waiting for details of the investment vehicle or asset class available from within a SIPP that guarantees risk free returns of 4.5% index linked every year.

Why do you always assume the drawdown fund will go down? It's just as likely to go up.

Not without taking investment risk it won't, something that most pensioners are keen to avoid when their only source of income depends on it.

And so the argument goes full circle once again.

EdInvestor

Pal wrote:

I am still waiting for details of the investment vehicle or asset class available from within a SIPP that guarantees risk free returns of 4.5% index linked every year.

There was never any suggestion that this was a possibility, good God, if it was, every retiree and IFA would be queuing up. :rolleyes:




Earlier Dunstonh said, and IMHO it's an important point:

And when that fund goes down .... who are they going to blame?

It's quite understandable that any IFA or other financial professional is now looking over his shoulder at the regulator and is frightened of misselling cases in what is seen as a "compensation culture" environment.The natural tendency in this situation is not to recommend anything which involves risk, regardless of whether or not it would actually be a sensible thing for an investor to do.

MSE readers should bear this in mind: if they want to do income drawdown in a SIPP, they will usually need to go the "execution only" discount cheapie route - but that's the one they would generally want to use anyway

dunstonh

It's quite understandable that any IFA or other financial professional is now looking over his shoulder at the regulator and is frightened of misselling cases in what is seen as a "compensation culture" environment.The natural tendency in this situation is not to recommend anything which involves risk, regardless of whether or not it would actually be a sensible thing for an investor to do.

There are loads of times that products are recommended to clients by all IFAs that the IFA themselves would not do for their own money. Just because we believe something is right and best does not mean that the risk associated with that is right and correct for every individual. A low risk person should not be considering drawdown. An individual who is likely to complain (which means they did not accept the risk) is not suitable for drawdown.

You just have to look at the situation with endowments (again) and the belief that they would always pay out enough. If you accept the potential for gain and potential for loss, then fine. If you accept the potential for gain but dont want the potential for loss, then you do not do drawdown.

MSE readers should bear this in mind: if they want to do income drawdown in a SIPP, they will usually need to go the "execution only" discount cheapie route - but that's the one they would generally want to use anyway

This is not a professional money website and the average poster here is a novice. Any novice trying to do drawdown themselves is taking extreme risk. It may be cheap but the potential to mess it up is much higher.

Getting the cheapest all the time is not the best option. Getting value for money is always the best solution.

EdInvestor

If you accept the potential for gain but dont want the potential for loss, then you do not do drawdown.

Entirely agree.

oceanblue_3

Edinvestor is the author of both of these comments....

"Also, note I am particularly talking about women here.A woman needs an index linked income because she lives so much longer and often retires younger.It is really not hard to beat rates for index linked annuities for younger women even with a very conservatively invested low-risk drawdown, because they are now so poor."

"There was never any suggestion that this was a possibility, good God, if it was, every retiree and IFA would be queuing up."

Perhaps you could explain the reason for the change of mind.

In addition, are you now able to share with us your information concerning drawdown providers being able to circumvent Inland Revenue rules?

Or are you, once again, going to evade a direct answer and, in an attempt to cover your bluster, loose off some well-practised invective at those who actually know what they're talking about?

deemy2004

Its not fair ! two IFA's against one Sipp investor - not bloody fair at all !