Avoiding Annuities: is 'drawdown' the right way out for you?

I think its important to remember that drawdown and annuity isnt an either/or choice - it is possible to have both. It might also be sensible to phase out of drawdown into annuities, which could be investment linked or conventional.

I recommend that anyone looking into these matters should get advice first.

Each retirement planning option has merits and disadvantages.

Keith Hanna

Specialist Pensions

keith.hanna@specialistpensions.co.uk

There are pro's and con's for both annuities and drawdown as we all know but the most important factor in the decision making progress is primarily the client's attitude to risk coupled with specialist advice to give a true understanding of how each option works. In some cases it can be argued that drawing down on a small sum of say £30,000 is in fact a sound proposition if for example there is an immediate need for cash at an early age (say 55) in order to pay off debt etc and ease cashflow in the current climate. Such a small pot of pension is unlikely either to give any great deal of retirement income in the form of an annuity and if a client accepts that they will never further fund this sufficiently but needs cash now at least this can be released and the fund still left to grow subject to chosen funds, assets and risk.

I note that both previous comments to this are from "advisors", who lo and behold are suggesting that specialist advice be taken.

If you have any intelligence at all there is so much free information available that you just need to research it and make your own decision rather than pay loads of money to some so called advisor who probably knows little more than you do but knows how to submit an invoice or take a hefty commission from your money.

One of the reasons that annuities are such poor value is in part due to the hefty commissions of advisors.

Interesting, that one of the contributors said the big question is

'What happens when you drop dead'.

To me that is not the big question.. The big question is, what happens BEFORE I drop dead. (especially as I don't have children)

As far as I'm concerned, I want to get as good a deal as possible, and it's seems before this legislation comes in, we didn't have that.

What I'd like to do, is take my 25% cash sum when I'm 58, in November, and then take a decision, and leave the rest for a few more years, and when I do decide to cash it in, then decide, whether to buy an annuity or use drawdown.

Hopefully because of the increased competition, from drawdown, annuities may improve too. If they're still not good enough, then I can continue with drawdown.

Annuity rates from Providers/Insurers that do not pay advisers are not necessarily better than those that pay for Advisory services.

The access to the Open Market is a major sticking point with major insurers who often provide annuities which are less competitive than those available on the open market. By policyholders simply defaulting to their existing providers this has often provided a strong source of income to the Insurer.

@ John Ness.

Specialist advisers ought to work on an agreed fee base for their work. So, the fee paid should not be dependent on the size of the annuity purchased.

Perhaps greater transparency of charges would provide a step forward.

The biggest problem I have is that NOBODY provides you with a clear & transparent cost statement each year. Charges are often absorbed/hidden. How can any of us making informed judgements if the industry hides much of the relevant information!!

Anyone entering retirement should seek financial advice. It is one of the biggest decisions they make, especially with larger funds.

Know it alls that have more knowledge than a good adviser should set up a practice and try to earn a profit, sit exams, qualify for cpd, pay ongoing FSA fees etc.............. but most of all help the general public to make a well educated decision to taking their income in the future and options available, not make smart ars@ comments like the ones on this blog!!

I am not particularly enamoured with so called ''advisors''...many of them charge a lot of money for quite imprecise advice,covering themselves for their own lack of clarity for what actually needs to be done.I think consumers on the form should make up a discussion form where they share their experiences and knowledge.

As ever, you have only yourself to blame if you hire 'advisers' to charge you and to cover their backs with the 'imprecise' advice that John Ness and Anil refer to. And as with all life's decisions, you MUST do your own research. Presumably, if you are one who has a personal pension fund that needs these sorts of decisions, you will know that already.

'Nuff said

I was convinced that drawdown was definitely the better of two bad madatory options. Problem: I invested the majority of my pension in Keydata. I rest my case.

The proposed new changes are to allow you to take all the funds in cash subject to criteria (and tax) yet to be agreed. So if you can wait to January next year. And Independent advisors are normally paid 1% of the purchase monies on annuities hardly a hefty commission as suggested by John Ness. And a good advisor is worth every penny he cant work for free and no I am not an advisor

I am happy to be in drawdown and take the investment risk which if managed correctly can be minimised. At least I have control over my income this way and the main problem I have with annuities is the poor value, rates and the possibility of losing everything if the annuity provider goes bust!!

How much is considered well off?

I would like to know why annunity rates have dropped so drastically in the past year. Sure;y the effect of current low interest rates etc. should not affect somenes income for the rest of their life. Insurance companies get all the cash up front but only have to pay back the income over a long period. Evereyone knows that interest rates will rise again as surely as night follows day. Looks like serious profiteering to me!

I would think that those who have grown their fund in a SIPP are capable of continuing with the required investment decisions. Indeed, bearing in mind that the article and responses give little credit to how these funds (- under SIPPS -) were created in the first place, it is not surprising that it is generally accepted that the population as a whole is totally incapable of looking after their own affairs!!

Under ASP the death tax charge rose to an effective 82%, but that was after full IHT was factored in. Under the proposed new rules the death tax charge will move to 55% regardless of age but is anyone clear if IHT applies on top of that to take the "new" charge to an effective 73%? This would still be an improvement but still very high.

They should introduce a rule so you can move your annuity to different providers midway through taking it.

re: How much is considered well off?

You would have to be well enough off to look after yourself without state support before you use income to drawdown.

The money in my SIPP pot is mine - not something for the professional financial industry to play with - however good thay say they are. I want ALL of it back - and NOW because I am healthy and 66 and there are plenty of business opportunities out there for me to invest in and take an active interest in. Drawdown levels are pathetic - I have made more on my SIPP than the maximum I was allowed to draw down this year. But this was through daily active SIPP monitoring and fund switching/sales. I did this - not my IFA who wanted to take the "long view" not an active daily role in its management.

If someone wants to use an IFA and buy income insurance - OK. But it should be voluntary. 100% drawdown should be the basic rule. Take the money and only then make choices with it. Personally I would not choose to invest in the stock market at all. I would put money into local physical goods and services, property and my children's companies.

This love affair with electronic money is the cause of the current financial crisis. The stock market is a global betting ring so why the government insists all pension moneys should be gambled there, God only knows.

All very interesting & as with all these debates there are some very differing points of view. Unless there are some serious health issues I can see no reason for doing a 'drawdown' contract with anything less than £250,000! The next issue seems to surround the issue of advise - I presume that any IFA worth his salt was not recommending anyone to put all of their funds into Keydata!!

Therefore do take professional advice - make certain you get a comprihensive risk analysis carried out annually as part of a full review - ideally make certain your IFA offers a 6 monthly review service. In addition look for a fee basis that does not exceed 1% for all the initial work in the first year and constantly build a meaningful dialogoue with your adviser.

As for annuity purchases look for an IFA who either charges a fee or can demonstrate that by their negotiation skills they can achieve a better rate.

-

I agree with "Nuff said." My experience is that most Financial Advisors know less than me! You need to take responsibility for your own funds, read extensively and go with what's best for you.

As a simple SIPP holder I read the press articles on pensions. Rarely do they give the whole story. Recently I read that if a pension pot is not 'vested' (ie no benefits taken) before age 75 the fund can pass to one's estate free of IHT. But what is not made clear is the effect of Fryer and Ors v HMRC where the fund was taxed after death because the taking of benefits had been deferred beyond the scheme retirement age. Most SIPPs have no 'retirement age' leaving it up to the individual to chose (before age 75). So my question is this - Under the proposed new rules, if a pension pot is not vested before age 75, will the death benefit (the whole fund) be able to pass to one's estate free of IHT. And, if so, what is meant by 'estate' - one's dependants or one's wider estate?

John Davies, I can tell you why it is almost always worth NOT buying an annuity.

Current top annuities pay around 6% for a male retiring at 65. On £250,000 that would be around £15,000 p.a. Average life expectancy for that male is 77. i.e. 12 years. 12 x £15,000 = £180,000. Hence the average person will lose £70,000 plus any interest investment gains over that 12 years.

For a male retiring at 65 he would need to live until 81 just to get back his initial outlay in the best annuitties available.

If that is the best our great financial institutions and wonderful advisors can do, I would rather have a crack at it myself, and back my own judgement.

P.S. Why does it cost £2500 for independent financial advice if you have a pot of £250000 but only £1500 if your pot is £150,000. Surely the cost should be the same.

I agree with all the comments about the pension companies. They are more interested in funding their kid's school fees and Porsches than their customer's pensions. Just take a look at the various tables and see how many of them fail to beat the FTSE100 in terms of performance over both the short and long terms.

This is all cobledygook designed to give free publicity to some people. The best choice is simple and blindingly obvious. You certainly do not need an IFA unless you are are charitaly inclined or brain washed.

When your grateful employer finally says good-bye to you, gives you your clock and shakes your hand, take the 25% tax free sum and invest it an income-and-growth investment trust or unit trust/ OEIC paying about 4.5% dividend.

Invest the rest of your hard earned pension savings in another 2 or 3 similar funds

Avoid like the plague any IT with incentive fees and any UT with TER over 1.75%. Their managers are too greeedy even for this industry of sharks

Live happily ever after on the dividends you will be receiving, currently about 4.5%, but growing at at least in line with inflation and probably more.

You wiil have no worries and when you eventually leave this world of woe, for paradise with 72 virgins, you will be able to bestow and bequeeth about 60% of the total to your charming daughter who will then be able to support her idle boyfriend in the station to which he has been accustomed.

I am a SIPP provider and, therefore, have a vested interest favouring income drawdown. Having declared my interest, let me emphasise there is no automatic best buy here and, as usual with financial decisions, it's horses for courses. Income drawdown is right for some people and wrong for others and similarly for annuities. Anyone who makes a blanket recommendation in favour of one or the other, or who universally condemns annuities, doesn't fully understand all the (rather complex) issues. For example, annuities are usually fair value for what they offer, e.g. guaranteed hassle-free income, etc. If you don't want to pay the price for this then that's your choice. And if you feel that you know enough about this not to need advice then, again, that's your choice. Unfortunately, the general state of financial education in the UK is rather poor so many people (those who don't read Citywire!) really do need help to make a sensible decision.

I do not understand all you people complaining that annuities and IFAs are a rip off ! Have you not heard of legalised robery or something?

If an IFA gets 10% of your funds, he only needs 20 fools like you to make his pension twice as big as yours. Beats working for a living don't it.

John Ness.......three cheers.....well said and agree with you 100 per cent

I agree with John Ness. It is absurd that government rules mean annuity returns for a male at 65 imply a significant loss of pension capital before average mortaliy kicks in. Annuities were invented by the financial services industy to serve their own ends, not the pensioner.

Its about time this financial instrument was put in the dustbin of history together with SIPPS, drawdowns and tax-free take outs. For goodness sake, the money is there to be SPENT. It is not supposed to be a never ending source of income in case the owner turns out to be Methuselah.

The very old spend very little but cost a lot to keep alive in homes and hospitals. The political equation is that the State pays for this because we are not a 3rd world society where old folk are supported directly by their children until they die.

This is why I argue for a complete and unequivocal change in the system to allow all of the money in the pension pot to be returned to its owner upon retirement after a suitable deduction of tax to take account of past tax relief.

If we did not have suc h a byzantine tax system, tax relief would not be given on money saved for a pension and when those savings grew no tax would be levied on any gains either. Simple. This is what most people really want to see which is why the great majority invest in their houses because they can get the money out with no tax or control. This is their real pension and over the years it has proved to provide a better return than a pension and it also provides a roof and living space. Its a no-brainer!.

It's just not true that income drawdown is 'expensive'. I recommend any pensioner, before making any decisions, to be to talk to Hargreaves Lansdown (Bristol) and be pleasantly surprised at how efficiently and cheaply they can resolve the problem for him/her. For the record, I have no connections whatsoever, (they just manage my pension and investments) with

Hargreaves Lansdown.

Well, astonishingly, we have an IFA on this blog [John Davies] who cannot even spell ADVICE! Talk about someone not being able to organise a p... up in a brewery!

John Ness says it all about annuities. The whole financial services industry is a con trick: they earn fees whether or not the investment is successful; hidden percentages are skimmed off; higher commissions paid for the same work, whether the investment is 250K or 100K, or fees are charged at higher rates than solicitors or accountants for IFA advice [£200 an hour?]

What the rascals never tell you is that they also get contingency commissions as well; for putting a certain amount of business to a particular company or if a certain level of profitability is achieved. These are never rebated if you agree to pay for fee based advice.

When I had to make the decision on how to take my pension six years ago I was going to go down the drawdown route - until my adviser arrived with all the literature and I saw on the next to last page that over a 15 year period the charges would (could) be £42,000. As the pension pot was only £106,000 to start with this, together with the possibilty of a market crash, I decided on an annuity ...£6450 at age 60 and 100% widows pension.

At least I can sleep at night.

For the life of me I cannot understand why you can't just draw out all of your pension money in one go (without deduction of tax - what was the point of the tax relief?) and invest it however you want, provided of course you can demonstrate you will not be a burden on the State. What could be simpler than that? Of course I don't expect IFAs to be in favour of it as where is their cut of your pension pot. Go for simplicity every time, cut out charges wherever you can should be the mantra.

For those with little or no experience of the financial world, doing your own research and making a decision based on the mountain of different figures, advice and information available (not to mention terminology that joe public does not relate to) could be likened to the first-time parachutist who is told to pick the right parachute with care and then left to his own device. Most of us are faced with this pension choice for the first time and have not a clue as to which system is the best for our own particular case. One IFA will tell you one thing and another something else. As an Equitable client, I made a wrong decision then, so the only two things in life that are certain are death and the fact that no one can say how much you will get in your pension when and if you finally get there.

I have decided to die sooner rather than later. How will the HMRC view my pension finances??

Average life expectancy for a healthy male aged 65 is 21 years (see Treasury consultation paper: "Removing the requirement to annuitise by age 75" - page 5) and a significant proportion will live longer than this. Life expectancy in retirement has increased dramatically since 1976 and looks to be continuing to increase. Investment is not the only issue you need to consider if you wish to manage your own pension.

"Average life expectancy for a healthy male aged 65 is 21 years ......... and a significant proportion will live longer than this." No sh*t sherlock. Are you an IFA Nigel? I'm about as good at Maths as the last Greek Chancellor of the exchequer. But if the average life expectancy is 21 years surely 50% will die younger than 86 and 50% outlive their 86th year.

There needs to be a change in the requirement for SIPP providers and their charges.

I do the majot decision making on investments and on setting up, to get a broker who would act on instructions, but not advise on investments except to perhaps suck his tooth if I were to be way off base I was charged £300 for the 'appointment'.

This year on take up of 2 rights issues and sale of part of another, guess what, another £300+, just for signing the documents and the cheques. No thinking, just sign and send on. Even though I am a professional, I can't even charge at that rate for that.

It is about time that the govt realised that we can and do think and not force us to waste our hard earned savings on these 'chancers' and beholden to them to even twitch our little fingers on investment etc.

And oh, the 55% death rate is more p*ss taking and makes hollow their promises to pensioners, whilst they have pensions at a rate we can only dream off.

Gordoom Brown robbed us nearly blind, and although this lot are just a tad less evil, they are still p*ss artists out to scre* us for more of our hard earned money which they have done nothing to earn, so we can only just see. There needs to be a lot less red tape and giving others the opportunity to pilfer our entitlement, and give us more control, with less interference.

William - I think the actual proportion that live longer than average life expectancy is around 55% (average is a mean not median) and somewhere in the order of 25% can expect to live longer than 7 years more than average. Note that population projections indicate a substantial increase in the number of 90+ year-olds to around 1.3 million by 2031 - so many of today's 65 to 79 year-olds. The point about all this is individual lifespan is highly variable and planning based on an average, even the correct average, carries a significant risk of exhausting money before you die.

I'm not an IFA. I work for a provider. Observations are based on government statistics.

Franco - what good and common sense advice you offer. I am going to take the same route in a couple of years, I will invest about 10% in BRIC's

Johnny Delicata is my real name.

nothing to add today