Pensions: how to avoid the annuity trap and provide a good income in retirement

Annuities are a dreadful concept, the "best" pay only around 5% so even with zero growth, return of capital would last you 20 years.

There are plenty of income funds paying 5%, quite a few 6% and several 7% and above, so even after charges, if you're prepared to take a little risk, leaving your fund invested and drawing down would seem to be a better option - plus you retain control of your fund. Buy an annuity and it's all gone.

The index linked variety are the worst value of all since it takes around 20 years to get back to where you would have been with a level annuity - depending on inflation etc.

Do a simple spreadsheet calculation to compare alternatives.

IMHO.

Don't buy an annuity at all...provided you've got enough in your SIPP.Much better idea!

One very sensible move by the new Government!

I don’t believe in Pensions at all. Having a mother who lost half a pension that she'd paid into for over 25 years due to equitable life, then purchasing an annuity only to pass away a year a later - my father received nothing of that either. The laws change every five minutes and I think I will be working until 75 at the rate of growth and the changes of govt we are likely to have in the next few decades. We don’t get 40% tax relief on the cash we put in anymore. Can’t pay in more than a certain amount and pay 20% tax on the way out, so to me there seems to be no tax benefit and a high risk - given recent pension % growth figures. I don’t have any better ideas however - I have a SIPP for what its worth, havent a clue fo how to work it and had to pay Advisors fees to set it up and run it anyway, seems to me a complete waste of time and money.

This system has to be reformed - losing all your capital for a paltry 5% or less looks like a serious rip-off, with the insurance companies the only real winners.

@Grumpy Old Man. What do you mean "provided you've got enough in your SIPP". I don't like the idea of annuities, but I thought the only way to get income out of SIPP was to buy an annuity. Am I wrong?

Anonymous 2 - I think we are talking about income "drawdown" as an alternative. As day Trader said it allows you to stay invested and drawdown an income whilst hedging your bets. There are risks, such as running down your pension fund so it's not a free lunch. SIPP pension providers like the big brokers( I use Hargreaves Lansdown) and possibly IFAs, can provide more information on the pros and cons, but watch the IFAs - they may make money out of selling you an annuity. If you are not in any hurry I'd wait to see what the new government comes up with, we might be pleasantly surprised.

Anonymous 1 - I sympathise with the bad experiences you have had, the financial landscape is littered with them, but it is possible to get a handle on this. The trouble is (despite the hype and advertising) we have to educate ourselves thoroughly and become pensions experts. When you take advice from an IFA, broker or pension company, with the best will in the world it's not their money and their future, it's a job to them. Obtain advice by all means, collect information but learn enough to be able to second guess these people and make your own decisions.

It takes a while to learn this stuff but anyone can get to grips with it, it's not rocket science, just keep at it.

I agree with Anonymous 1. We need a major change in the pensions scene so the savings pot is completely owned, recovered in full and managed by the pensioner. He can then decide to use an IFA or if he knows what he is doing he can manage the money and buy whatever products he wants - shares, buy-to-lets, whatever.

It is scandalous that we have to save such enormous pots for a risky and rotten return when our individual circumstances may change rapidly over time.

Come on Ros Altmann - start something really new and get a loud and influential body of comment behind the idea that the pensioners pot his HIS money and no-one elses! He should be able to recover every penny as cash and should NEVER be forced into buying financial products with it.

Anon2.Announced today on the front page of the Telegraph.Government to do away with compulsory purchase of annuities,providing punter can prove income of ....a figure of £ 10 k per annum was mentioned.Can't go into detail am in a tearing rush,but hopefully there will be comment in the weekend press!Google the Telegraph news,should find something there!

A little bit of good news amongst all the gloom anyway!

It seems to me that an intelligent investor will spread both risk and reward, and the ratios between the two across different investment sectors. Just because we are looking at retirement income, why should our strategy change. I have recently purchased an annuity on the open market, using part of my pension pot, sufficient to pay for life's necessities. I have arranged income drawdown on a further section of my pension pot, whilst the remainder stays invested. Income drawdown enables me to increase/decrease my income to take account of investment returns and my family needs. The remainder left invested keeps further options open. ISAs provide me with further income free of income tax, and several insurance investment bonds and my regular share holdings allow me to utilise my CGT allowances, whilst my investment properties provide a reasonable income on a solid asset class.

Annuities in isolation are a potentially disastrous route to a retirement income. As part of an investment strategy they have their part to play.

I was one of the first to use drawdown in 1995. I only had a small pot from a couple of years self employment.(my main deferred pension was via a company scheme, and I was fully expectingto use this up by the time I could draw the company pension).. I started with 15000. Ive taken between 230-120 Every month ever since. The charges have got much cheaper and cheaper . My fund, following lots of investment mistakes and stock market collapses is now £8000. Ive just taken a further 1200 from it for this year-and so it goes on. Amazing really. Currently enjoying income from corporate bonds. Obviously if I had a much bigger fund I would have been able to retain more capital. I thinks its great. Sinics approach I would endorse. Flexibility is a great plus

"Come on Ros Altmann - start something really new and get a loud and influential body of comment behind the idea that the pensioners pot his HIS money and no-one elses! He should be able to recover every penny as cash and should NEVER be forced into buying financial products with it."

This "system" is up and running in Australia and within the current "Superannuation" system. When one retires in Oz (at 55 and above)your "Super" pot is yours to do whatever you want with it, even to take the whole pot in cash if that's what you want. As far as I'm aware there's no restriction on ensuring an income from the pot, which means that the Australian system is far more flexible than the potential new UK rules as posted by Gumpy viz: "Government to do away with compulsory purchase of annuities,providing punter can prove income of ....a figure of £ 10 k per annum was mentioned"

It would seem that the current UK coalition government could be close to making changes to the current "compulsory purchase of annuities" system. However, it looks as though it's gonna be done at a relatively slow pace before, eventually legislation is put in place to provide full and unencumbered ownership of one's own pension pot in a similar way to the Australian Superannuation rules.