IFA Annuity Commission Fee

tfc

Retired_I.F.A. wrote: »

Besides which any IFA who recommends an annuity ought to have his head looked at and an IFA who recommends an escalating one ought to be shot at dawn.

That is very interesting. Being in the situation of having a SIPP in drawdown in its third year with a fund value which seems to be on a continuing slide even with modest drawdown amounts, and an IFA who funks every opportunity to stem the slide, I am beginning to think I have done the wrong thing. I now have one of the large IFAs telling me that dawdown is not for me, and annuity is a much better solution.

It isn't, financially at day 1, but I can see that a steady growth could be much more beneficial than the likely result if takes the market another 2 years to recover and I am still using drawdown.

So the relative stability of an annuity is beginning to feel attractive. I understand the issues about lack of flexibility. I rejected the idea of an annuity initially, as I was under the impression that drawdown offered better income rates, but I can see I was probably mistaken in that.

But your comments do deserve some further explanation as they are implying that an annuity should be avoided under almost all circumstances.

I am particularly interested in your comments re escalating annuities, as they would seem to remove some of the worry of inflation. I do appreciate that you have to pay more for the escalation, and you might feel that getting the higher amount from a level annuity would allow the user to invest more efficiently for the future to cover any inflation shortfall.

But that's the nub of the problem. How do you do this with any degree of certainty? If that can be done, then I can see that it could be done for drawdown anyway, and so annuities would not be so attractive.

I would be grateful if you could explain your arguments a little more, and I think it would be useful to others also.

I apologise if this has been answered elsewhere. I am not trying to be argumentative. I am just very interested in your views, particularly because of your 'past life', and I can see from the number of 'Thanks' that your posts are generally valued.

Thanks


T.

EdInvestor

tfc wrote: »

That is very interesting. Being in the situation of having a SIPP in drawdown in its third year with a fund value which seems to be on a continuing slide even with modest drawdown amounts, and an IFA who funks every opportunity to stem the slide, I am beginning to think I have done the wrong thing.

How is your drawdown invested and what charges are you paying? What income level are you taking?

tfc

In unit trusts/OEICs, spread (approx) 75% equity 15% Fixed Int. 3% bonds, 4% cash.

85% of GAD limit, currently only 27% of fund is in drawdown.

£370 p.a. + the usual funds charges which are contained/hidden in their pricing

Retired_I.F.A.

A person able to fully understand drawdown vrs annuities who chooses an annuity is a person who though able to understand has not or one that has been advised by a muppet.

One must be made aware of what the underlying interest rate is on an annuity not the annuity rate as most of that comes from the stripping out of the purchase price by life expectancy. The underlying interest (long dated gilts) rate today is around 4.7%. Do you really fancy investing what is probably your biggest asset in a fixed 4.7% account for the rest of your life? You'll cry like a baby when inflation rises or do you think for the rest of your life we will never see it rise above todays rate?

Escalating annuities are terrible, I really do believe any IFA who recommends one ought to be shot at dawn. You only have to draw a graph, income up the side, age across the bottom starting from retirement age (lets say 60) to say 100 with a dotted life expectancy vertical line at whatever that is (lets say 80). Then plot the income from an escalating annuity which will give a curve upwards from left to right. Then plot the level annuity income as a straight line across the graph. Where the lines cross shade in the segment on the left showing the extra income and compare it to the segment on the right which ends with the dotted line and I gaurentee you if you've drawn it to scale the two segments are the same regardless of the escalation rate.

That graph paints a picture that should stay in your mind indefinately as you only get more from an escalating annuity if you live beyond life expectancy.
Then look at the actual amounts, do you really want to live on as much as a half as what you can have just to say it's inflation proof? The lines cross somewhere aound 72 if I remember right although last time i drew such a graph annuity rates were higher as they were not based on the measly 4.7%
gilt yield of today it was on 5.5% or thereabouts.

Reality is you have to be sitting in a bath chair in the oap's home aged 83 or so before you can say.. " I have had more income because I chose escalation"
Thus the wise man chooses the level annuity and enjoys the higher standard of living it gives him while he's young enough to enjoy it.

The really wise man however stays invested and draws down the maximum income allowed.

jamesd

tfc, a slide in value even without drawing any income at all is what many in equity funds would have seen over the last year. Not of great concern long term but worrying over three to five years.

Drawdown does require being willing to watch the down periods as well as the up periods. Now's probably not a great time to switch to lower risk investments (more bonds perhaps) because the equity prices have already dropped and you'd be locking in a loss and losing the growth potential.

If you'd like to say which funds and percentages the money is invested in someone might comment on whether it looks suitable long term.

dunstonh

Both annuity purchase and drawdown are valid options. Personally, drawdown makes more sense in my eyes. However, there are plenty of people (the majority if you believe the views of the FOS) who are just not able to understand investing. So, putting their retirement provision into drawdown is just waiting for a complaint to happen.

Investments can go down as well as up. The investment period is fixed in that at age 75 you go to annuity. So, you may not have the luxury of being able to wait out a downturn and recovery.

We have people on this thread who know about investments, who know the risks and the pros and cons (or suggest they do) so we are getting a very pro-drawdown bias. However, that is not a true reflection of the typical public who are not experienced or knowledgeable with investments, wont monitor them and typically wont have much in the way of provision to put at risk of investment returns.

The best thing to do is make sure you know the pros and cons of both options to enable an informed choice.

EdInvestor

tfc wrote: »

In unit trusts/OEICs, spread (approx) 75% equity 15% Fixed Int. 3% bonds, 4% cash.

85% of GAD limit, currently only 27% of fund is in drawdown.

£370 p.a. + the usual funds charges which are contained/hidden in their pricing

To my mind it's very important to minimize costs in drawdown - my own plan works out at around 0.2% a year.I invest through a provider with no annual fee and own a portfolio which is mainly made up individual shares which pay good dividends - these I rarely trade, and thus don;t incur costs.

The result is the drawdown has a natural income of 5-6% a year, with only a small deduction for costs. This supplies the vast majority of the annual income without needing to cash in capital. I keep some funds in the cash account earning interest to top up to the GAD limit.

This way there is no need to deplete capital during the inevitable downturns that you have to accept with any equity- based investment.

To my mind the basic question underplinning the annuity vs drawdown argument is what bothers you the most?

- The volatility of your capital invested in the market ( not a problem for me as dividends are stable and rising)

-or the likelihood of inflation decimating your annuity income.

As someone who remembers the 1970s very well, the second risk is IMHO undoubtedly the most scary for a retiree.(As retired IFA says the index linked annuity is not an option because it is such shocking value).

You only have to look at what's happening to fuel and food prices as we speak to see how rapidly this can become a threat.Those who were invested in equities with good yields through the 70s found that their income kept up with inflation whereas cash type assets rapidly became worthless.

Things are actually better today because most people will have state pensions which cover at least the basics and are index linked, and often a company pension on the same basis.

jem16

EdInvestor wrote: »

To my mind the basic question underplinning the annuity vs drawdown argument is what bothers you the most?

- The volatility of your capital invested in the market ( not a problem for me as dividends are stable and rising)

Ed, what percentage of your pension funds are in drawdown compared to other pension provision such as final salary (presumably index-linked?) and state?

tfc

Thank you all for your replies. I have really found them useful.

Concerning my initial query about IFAs being shot at dawn, I really was just concerned that there was something that I had missed completely about the relativer advantages/disadvantages. I think not. As was pointed out earlier, it is a matter of whether the person wants/can afford to take risks.

I am not sure the comments about the poor value offered by annuities are really fair. I think the point is whether your retirement income can provide the level of income you need with a level of security. The real issue is that it is very difficult for an individual to save enough for a proper retirement income in the present savings and retirement scenario. Collaborative schemes, can do better than an individual because of the inevitable differences in actual lifetimes.

I am grateful for the comments about how a drawdown should be working. I thought that’s how it should be. Perhaps my IFA didn’t get it, as there are 25% of my funds in accumulator units, or slated to produce less than 1%. There is no way that will produce a natural income of 5%. Also all the income is reinvested, rather than providing cash. You can retrieve the cash by selling some of the units, but with an IFA who just funked everything, even that became a problem and it was a necessity to sell units just at the worst time. (you can just imagine what a hole is made by holding ‘Aberdeen Property’ in such conditions.)

I have some thinking and some rearranging to do.

Thank you for the views.

T.

Retired_I.F.A.

tfc wrote: »

"it is a matter of whether the person wants/can afford to take risks"

NO IT IS NOT !

Try reading my post once more please.