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  • FIRST POST
    EdInvestor
    • #1
    • 12th Jul 05, 7:15 PM
    12th Jul 05 at 7:15 PM
    Official MoneySavingExpert.com insert

    For full info on how on annuities, see the main website's downloadable Annuity Guide.

    Back to the original post...

    ------------------------



    <board guide edit: Given that this thread has been highjacked to become another "income drawdown/annuity purchase" discussion, I have split it into two threads. Please try and stay on-topic this time.

    Pal>

    Pam

    As of next year you won't have to buy an annuity.Instead you can keep the fund invested and take an income from it when you retire.This is called "income drawdown". Later you should be able to leave this fund or what's left of it when you die to your heirs ( though they haven't quite figured out the tax aspects yet.

    IMHO, as long as it's correctly invested and you don't take out too high an income, income drawdown can be a better bet especially for women, who tend to live a long time and get !!!! annuity rates compared with men.Although some people will say it is risky - as the value of an invested fund can go down as well as up - with an annuity, inflation eats away at the value and in 20 years its spending power is halved. Not so much a risk as a dead cert that the older you are, the poorer you'll be.


    Meanwhile here's a brief guide to all the options now available for financing retirement:

    http://www.timesonline.co.uk/tol/money/pensions/article5014150.ece
    Last edited by MSE Sally; 27-03-2013 at 4:19 PM. Reason: Explaining thread split
Page 1
    • dunstonh
    • By dunstonh 12th Jul 05, 8:19 PM
    • 98,597 Posts
    • 67,055 Thanks
    dunstonh
    • #2
    • 12th Jul 05, 8:19 PM
    • #2
    • 12th Jul 05, 8:19 PM
    Is this deja vu?

    Although some people will say it is risky - as the value of an invested fund can go down as well as up -
    Some? Just about every financial professional.

    with an annuity, inflation eats away at the value and in 20 years its spending power is halved.
    Only if you buy a level income.

    Drawdown is investment backed. If you draw more than the investment makes, your fund will drop. If this continues, you end up with nothing left and no income. To reduce the risk of this happening, you have to take less income than you can achieve on an annuity. Indeed, the amount will often be similar to to what you achieve on an index linked annuity at the start. At least then the annuity increases annually.

    So, to achieve a higher income with drawdown, you need to pay more into the pension. But why pay more in if capital retention is important to you? You may as well use ISAs or other investment wrappers.

    As always, I am not saying drawdown is a bad thing. It is however, not a risk free option and this post is made for balance.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • EdInvestor
    • #3
    • 13th Jul 05, 11:02 AM
    • #3
    • 13th Jul 05, 11:02 AM
    To reduce the risk of this happening, you have to take less income than you can achieve on an annuity.

    Not necessarily.It depends on the yield of the investments and how they perform.The big plus point is that although there is a risk the fund may go down, there is also the possibility that it can go up - and thus deliver a rising, inflation-beating income - and you don't lose the capital

    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.

    Annual income from pension fund of 100,000
    Woman, index linked to RPI, 5 year guarantee

    Aged 55 3,339
    Aged 60 3,847
    Aged 65 4,435 [equivalent income for a man at 65, 4,873]

    And this income is taxed, of course.

    These figures are not hard to beat from a very low risk investment portfolio much less a racy one.Annuity rates for women are now so poor and the products such bad value that IMHO the "official" generic advice should be reviewed.

    Certainly they are so poor that it is hard to see the value in pension saving by women where there is no employer contribution.
    Last edited by EdInvestor; 13-07-2005 at 1:09 PM.
    • dunstonh
    • By dunstonh 13th Jul 05, 3:17 PM
    • 98,597 Posts
    • 67,055 Thanks
    dunstonh
    • #4
    • 13th Jul 05, 3:17 PM
    • #4
    • 13th Jul 05, 3:17 PM

    To reduce the risk of this happening, you have to take less income than you can achieve on an annuity.

    Not necessarily.It depends on the yield of the investments and how they perform.The big plus point is that although there is a risk the fund may go down, there is also the possibility that it can go up - and thus deliver a rising, inflation-beating income - and you don't lose the capital
    Ahh, this is the whole point though. It can be better if the investment returns are good. It can be worse if not. No-one knows what investment returns are going to be. The lower the risk you take on the portfolio, the lower the returns are likely to be and in turn, the less you will be able to take.

    In the real world, when you start talking about whether someone wants to take investment risk with their retirement income, the most common response is no. No matter what you think is right for you. Even if financially one option should be better/could be better, if it makes the person feel uneasy and scared for their retirment income, they should not do it and stick with the annuity option (which looking at 4.8% in your example for a 65 year old male with income increasing annually, isnt too bad compared with current interest rates).

    Perhaps, rather than hijacking the threads over a period of time saying much the similar things, if you want to create a "drawdown thread", I would be happy to participate on that, as will no doubt all the others who disagree with you
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • EdInvestor
    • #5
    • 13th Jul 05, 8:14 PM
    • #5
    • 13th Jul 05, 8:14 PM
    Sorry DH, but I don't think that a discussion of pension income options is "hijacking a thread" started by a lady who is asking whether or not it's a good idea to contribute to a pension.


    Another poster said:

    The debate on annuity versus drawdown is pointless at this time and I would imagine will only confuse you further as you mention you dont know anthing about pensions.
    One reason why there is so much disappointment about pensions is because people have been pushed into them without enough information as to whether they are the right way to invest, and whether the way they operate (including the annuity aspect) is suitable for the investor's needs.

    Isn't it about time this information was made available? Why treat investors as twits who shouldn't worry their pretty little heads about these complex matters (leave it to the men...) :rolleyes:

    ...they should ... stick with the annuity option (which looking at 4.8% in your example for a 65 year old male with income increasing annually, isnt too bad compared with current interest rates).
    Actually, IMHO it's very bad even for men compared with current interest rates, given that it's taxed.

    But as I said before I am specifically talking about the annuity issue as it relates to women on this thread because the OP is a woman. The position is very substantially different from that for a man, to the major disadvantage of the woman. IMHO women need to take this on board.

    If you don't agree, then perhaps you could explain why.
    Last edited by EdInvestor; 13-07-2005 at 8:17 PM.
  • whiteflag
    • #6
    • 14th Jul 05, 11:56 AM
    • #6
    • 14th Jul 05, 11:56 AM
    Sorry DH, but I don't think that a discussion of pension income options is "hijacking a thread" started by a lady who is asking whether or not it's a good idea to contribute to a pension.
    I disagree- contributing to a pension and retirement options are completely separate issues. Unless you have a pension fund in the first place the choice of annuity etc becomes academic.

    I find it hard to believe anyone would question the merits of joining a pension scheme with a 6% employer contribution. What other investment would be capable of outperforming this given the pension will receive an 6% extra per annum in contributions. Plus the fund will grow virtually tax free and the contributions could get tax relief of up to 40%. The funds are top quality and will more than likely benefit from discounted charges.

    Why for one second would EdInvestor want to put any doubt in anyones mind as whether to join this scheme. Its a no brainer!
    • Pal
    • By Pal 14th Jul 05, 12:54 PM
    • 2,062 Posts
    • 731 Thanks
    Pal
    • #7
    • 14th Jul 05, 12:54 PM
    • #7
    • 14th Jul 05, 12:54 PM
    I agree with Dunston - this thread has been highjacked. I have therefore split the thread into it's two subjects.

    Please keep to the topic going forward.

    EdInvestor: Please name a very low risk investment that guarantees continued annual investment returns of at least 4.5% that increases each year in line with inflation.
    Last edited by Pal; 14-07-2005 at 12:58 PM.
  • EdInvestor
    • #8
    • 14th Jul 05, 5:26 PM
    • #8
    • 14th Jul 05, 5:26 PM

    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.

    Annual income from pension fund of 100,000 pounds
    Woman, index linked to RPI, 5 year guarantee

    Aged 55 3,339
    Aged 60 3,847
    And this income is taxed, of course.
    by EdInvestor

    I think you've missed my point really.
  • ReportInvestor
    • #9
    • 14th Jul 05, 7:12 PM
    • #9
    • 14th Jul 05, 7:12 PM
    Why for one second would EdInvestor want to put any doubt in anyones mind as whether to join this scheme. Its a no brainer!
    by whiteflag
    EdInvestor was the first to reply in the original thread.
    This sounds like a good idea - 6% free money from the employer
    by EdInvestor
    Last edited by ReportInvestor; 14-07-2005 at 7:17 PM.
    • Pal
    • By Pal 15th Jul 05, 10:25 PM
    • 2,062 Posts
    • 731 Thanks
    Pal
    I don't think I have understood at all, however please feel free to clarify. You said:

    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.
    by EdInvestor
    So to repeat my question: Please name a very low risk investment that guarantees continued annual investment returns of at least 4.5% that increases each year in line with inflation. Given that annuities are effectively priced based on a mixture of Government and corporate bond yields, I am very interested to hear of any "very conservative" "low-risk" investments that you think are a suitable alternative.
  • deemy2004
    Index linked government stock
  • oceanblue
    Index-Linked Government Stock
    Deemy, there is no way that you could achieve that level of return from Index-Linked Government Stock. Although all the recent issuance has been 2% or 2.5% plus inflation, it has often raised over twice the face value for the longer terms.
    Effectively, you're paying 200.00 or so for a stock that generates up to 45.00 per year, index-linked - that's a yield of 2.25%, not 4.5%.
    oceanblue is a Chartered Financial Planner.
    Anything posted is for discussion only. It should not be taken to represent financial advice. Different people have different needs, and what is right for one person may not be right for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser; he or she will be able to advise you after having found out more about your own circumstances.
  • EdInvestor
    Pal

    As you know, the way successful income drawdown plans work is by investing in assets which produce a yield - a dividend, an interest rate, whatever and then matching the income to the yield, allowing the capital to grow.To obtain the rising income a percentage of the fund would be invested in assets which tend to rise in value over time and produce rising yields.

    This will produce volatility on the capital side, but this need not necessarily be a major concern. The inflation risk is IMHO much more serious than capital volatility over a woman's 30 year retirement. What is important in retirement is stability on the yield (the income) side, and preferably a rising yield.Even with a big stockmarket crash like the one 5 years ago,many portfolios will now have completely recovered, with no damage at all from the volatility and a stable income throughout.

    The types of investment which produce stable and rising income are blue chip companies with the relevant dividend policy, commercial property funds, some corporate bond funds ( though you must be careful with funds as the charges can eat heavily into returns.)

    An appropriate mix of these would be combined with cash, exactly how would be different for every portfolio according to the state of the various markets at the time and other criteria, including what the investor is comfortable with.[Women it is said, are often more comfortable with long term buy and hold equity investing that men, who are either too impatient, or too nervous about volatility.]

    The investor gets to keep the capital, and hopefully pass it on to heirs later: and for many investors the ability to do this (not available with an annuity) will also provide an additional element of security: the flexibility to use his home to generate extra income ( eg via equity release) if necessary, without feeling guilty about children's inheritance.

    That's an important safety factor.
    Last edited by EdInvestor; 16-07-2005 at 12:38 PM.
  • oceanblue
    Pension Fund Income Withdrawal
    Quote from Editor/Edinvestor........"Even with a big stockmarket crash like the one 5 years ago,many portfolios will now have completely recovered, with no damage at all from the volatility and a stable income throughout."

    I know I've said this before but, perhaps, it's worth repeating.........Editor/Edinvestor, your glib pronouncements are very dangerous. This generalisation of yours is completely misleading and, I suspect, demonstrates your lack of experience in actually advising real people, face-to-face.

    1) Many investors who commenced drawdown contracts 5 years ago are still nursing substantial losses; these losses have prompted their drawdown providers to reduce their incomes. Don't forget: the individual investor does not have complete control over the amount of income s/he receives.

    2) The FSA would always class these contracts as being more suitable for those customers whose tolerance of risk is above average. For you to describe them in the way that you do is grossly unfair. You are a loose cannon on a rolling deck, and I wish you would learn to control your irresponsible exuberance.

    3) Do not follow Editor/Edinvestor's suggestions just because he sounds confident and breezy - he is not responsible for your actions [YOU ARE!], and I believe he is simply attempting to promote his own website.
    oceanblue is a Chartered Financial Planner.
    Anything posted is for discussion only. It should not be taken to represent financial advice. Different people have different needs, and what is right for one person may not be right for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser; he or she will be able to advise you after having found out more about your own circumstances.
  • EdInvestor
    There are many people who believe annuities are the wrong product.

    Here's some research on the issue

    Readers should be aware that income drawdown is the normal way people finance retirment in most comparable countries, like the US,Canada and Australia. Annuities are only of minority interest for a part of a pension fund. This is because of the inflation risk, especially for women. The paper above suggests that a woman retiring at around 60 should have 60% of her fund in equities.


    Many investors who commenced drawdown contracts 5 years ago are still nursing substantial losses; these losses have prompted their drawdown providers to reduce their incomes. Don't forget: the individual investor does not have complete control over the amount of income s/he receives.
    Let me explain a little for those who aren't familiar with the way drawdown works. Drawdown plans contain safeguards to stop inexperienced investors - or incompetent IFAs - from losing all the money in the fund through unwise investments or unexpected crashes .

    There are limits to the amount of money you can take out. But unlike level annuities, the income from drawdown is flexible within the top and bottom limits which are set according to gilt rates, and the top limit is significantly higher than comparable annuity rates.

    Thus, if we take a 55 year old woman with a 100k pension fund, under drawdown she would be able to take an annual income of 7,000 quid, compared with the best current rate of 5,640 if she spent all her capital on an annuity. A 60 year-old woman could take 7,800 from her drawdown plan, compared with 6,078 from a level annuity.

    There's a second safeguard: every 3 years the provider is required to check the state of the fund and adjust the income limits to take account of whether it has got bigger or smaller. Let's say our 55 year old woman's fund is now 20% smaller because of losses in the stockmarket crash, so her limit should be cut so she doesn't run out of money. But she's also 3 years older, so her income limit for the next 3 years would adjusted upwards. Overall it would work out at 5,920 for the next three years.That's a reduction on the original 7,000, but it's still higher than the 5,640 that she would have got from the annuity.And meanwhile her fund will be increasing again as the stockmarket recovers, so at the next review she can probably expect an upwards income revision.

    Similarly for our 60 year old, her 20% fund loss will translate into an income reduction to 6,720, still higher than the 6078 she would have been getting from the annuity (and she's already 5,100 better off in income terms over the three years if she's taken the max from the drawdown).

    Now this assumes that our drawdowners are taking the full amount from their fund.But many may not need to do this: rather they may prefer to match their income more closely to the yield on their investments.So if they establish an investment package consisting perhaps of shares paying an overall dividend yield of 5-6%, property funds payng 6%, corp bonds 6-7%similar and gilts/ cash of around 4%, then they can take an income of around 5.5% and leave the capital entirely alone to grow for later.

    For our 60 year woman, that would be a reduction of less than 500 pounds annually on the starting income for a level annuity (and much higher than an index linked annuity), for our 55 year old the difference is minimal.Not accessing the capital should allow it to grow in future, thus increasing the fund size and the drawdown income top limit, providing inflation protection.

    As the fund grows and the drawdowner gets older the fund grows and more of the larger capital can also be taken as income if required. By contrast,the fixed income annuitant has no capital,no flexibility and the value of her pension is falling every year.

    Income drawdown does require some attention and needs to be done through a low cost provider to be sure of success. It won't suit everyone in the UK, one of the few countries which have a long history of compulsory annuitisation. But as I've said, in other countries it's the norm, and for people retiring young with 30 years ahead of them, it's considerably less of a risk than an annuity IMHO because of the inflation aspect.

    Of course anyone who elects to try drawdown and finds they don't like it can convert their fund to an annuity any time.
    Last edited by EdInvestor; 17-07-2005 at 4:06 PM.
  • oceanblue
    Pension Fund Income Withdrawal
    "Thus, if we take a 55 year old woman with a 100k pension fund, under drawdown she would be able to take an annual income of 7,000 quid, compared with the best current rate of 5,640 if she spent all her capital on an annuity. A 60 year-old woman could take 7,800 from her drawdown plan, compared with 6,078 from a level annuity."

    Edinvestor, have you ever actually advised on drawdown? The reason I ask is that the figures quoted above bear no resemblance to those I have recently obtained from the Government Actuary's Department website.
    I should be most grateful if you would show your workings........
    oceanblue is a Chartered Financial Planner.
    Anything posted is for discussion only. It should not be taken to represent financial advice. Different people have different needs, and what is right for one person may not be right for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser; he or she will be able to advise you after having found out more about your own circumstances.
  • whiteflag
    As of next year you won't have to buy an annuity.Instead you can keep the fund invested and take an income from it when you retire.This is called "income drawdown". [QUOTE]

    Edinvestor demonstrates his basic lack of knowledge on this area in the opening line of this thread. Why do you have to wait until next year to do income drawdown?
  • EdInvestor
    Hello OB

    The figs are from Billy Burrows's site.

    http://www.williamburrows.com/ar/rates.asp

    Whiteflag: for simplicity's sake I thought it easier on the other thread not to go into the question of "alternatively secured income" for post aged 75 drawdown.The whole thing is unnecessarily complicated as it is :rolleyes:
  • oceanblue
    Pension Fund Income Withdrawal
    Edinvestor, advisers are obliged to refer to the Government Actuary's Department website

    http://www.gad.gov.uk/Publications/docs/NonProtRightsInstructsTables_9May2005.pdf

    not to the website that you have mentioned. Do you know what you're talking about?

    The website that you have referred to won't be able to quote maximum incomes in any meaningful sense, and their gilt yield figures may well be out of date.

    If you really know what you're talking about, use the information I have provided to calculate a 55-year-old woman's maximum income under drawdown. Let's see if it's 7,000.00.

    While we're on the subject.......can you guarantee that annuity rates will improve for this particular person between ages 55 and 58? Age is not the only important factor to affect gilt yields.
    oceanblue is a Chartered Financial Planner.
    Anything posted is for discussion only. It should not be taken to represent financial advice. Different people have different needs, and what is right for one person may not be right for another. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser; he or she will be able to advise you after having found out more about your own circumstances.
    • dunstonh
    • By dunstonh 18th Jul 05, 12:08 PM
    • 98,597 Posts
    • 67,055 Thanks
    dunstonh
    With regards to rates, I believe the comments referred to the drawdown income figures you quoted rather than the annuity rates. That site does say drawdown is high risk.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
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