Annuity or Income Drawdown

PACH

At present I have a With Profits company pension scheme and another six years to retirement. From now on I will have the option to choose the investment portfolio. The choice is between: 25% equities and the rest in non-equities i.e. corporate bonds, goverment stock etc. or
55% in equities and the rest in non-equities.
I have two questions:
1. which investment to choose from the above options?
2. when it comes to retirement, which will be the better option for me: to take out an Annuity or Income Drawdown? ???

dunstonh

if you move out of the with profits fund, make sure that there is no market value reduction. Switching can invoke this if there is one. Assuming there is not, you should choose the funds that are appropriate to your risk profile and no-one elses.

You need over 100k fund after tax free lump taken to do drawdown and it may or may not be better for you depending on the annuity rates at the time you retire and your risk profile. Drawdown can be beneficial but it should also be considered high risk.

PACH

Thanks for your quick reply. I am not going to move out from my present plan, only now I can choose how the money is invested.
Can you give me some more information on the Drawdown process as I am not up to speed with this?Also the +s and -s of this option.

Pal

Drawdown = you leave the money invested and take a proportion of the capital out every year. You have to use what is left to buy an annuity before you are 75 years old.

The advantage is that if investments do well and/or annuity rates improve you can get more pension;

The disadvantage is exactly the opposite, you can lose out badly if your investments do badly.

The annuity is the safest option but you might not get the best pension.

If you do not understand drawdown you MUST get financial advice before proceeding with it. It is not for the faint hearted. This advice will cost you money so you need to have a large amount of money in the pension scheme to make it worthwhile doing.

Why do you only have two investment options?

dunstonh

I am not going to move out from my present plan, only now I can choose how the money is invested.

fund switching is still potentially liable for a market value reduction.

Rafter

PACH,

Regarding your investment options nobody can advise you one way or the other, they can only highlight the relative risks.

As you approach retirement (particularly if you are going to take an annuity straight away) you should move out of equities into less volatile securities so your fund isn't at risk of being at a low point, just as you need to buy an annuity with it.

Hence you are being given the option to switch out of equities now.

You may miss out on better stock market returns in the next 6 years, but at least the risk of there being a stock market fall just before you retire is reduced.

If you have other savings and investments and have paid off your mortgage etc, you may decide it is worth the risk. If the stock market is at a low point when you retire, you can always defer buying your annuity until things look rosier. In theory the annuity rate you get should adjust for this effect, but it isn't a perfect market.

As for your drawdown options, it is up to you.

Although I'm only in my 30's I plan to be fairly philosophical about the whole annuity business. I will probably take a lump sum which will be my 'enjoyment' fund to spend in my early retirement on seeing the world and enjoying a good standard of living while I still have my health.

I'll also take an annuity sufficient to ensure I have a reasonable income for the rest of my life too. If I die early in retirement that is just tough luck and I won't get hung up about it. If I live to be 100 though, I'll know that the annuity with continue to pay out for as long as I'm breathing!

Hope that helps.

R.

PACH

Thanks for all your replies so far.