Income drawdown vs annuity purchase at retirement

A question about : Income drawdown vs annuity purchase at retirement

Official MoneySavingExpert.com insert

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

Back to the original post...

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

https://www.timesonline.co.uk/tol/mon...cle5014150.ece

Best answers:

• Is this deja vu?
  Quote:
• 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.
• 
  Quote:
• 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:
  Quote:
• 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.
• I don't think I have understood at all, however please feel free to clarify. You said:
  Quote:
• 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 Ј200.00 or so for a stock that generates up to Ј45.00 per year, index-linked - that's a yield of 2.25%, not 4.5%.
• 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.
• 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.
• 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.
  Quote:
• "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........
• 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?
• Hello OB
  The figs are from Billy Burrows's site.
  https://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:
• Edinvestor, advisers are obliged to refer to the Government Actuary's Department website
  https://www.gad.gov.uk/Publications/d...s_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 Ј7,000.00.
  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.
• 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.