Annuity or Drawdown ?

[ArtificialInsanity]

Hi Folks,

First time posting to this forum so I'm hopeful of getting an opinion or three

I am in my early 60's and now working 3 days a week with a view to retiring later this year or next.

By some standards, my "pot" isn't huge .. £50K in a SIPP and £50K in a Cash ISA (as I value
some stability and Capital Preservation)

Additionally, both my wife and myself have modest Civil Service Pensions plus we have other Capital held
in Cash Savings ( my wife is very risk averse) and currently this provides a small monthly
interest payment ( ~ £300).

I am torn between getting an Annuity (Fixed Term or Life which on 50K would return approx £2.5K or
under per year) OR just selecting a couple of reasonable dividend paying Funds and putting the SIPP
into Drawdown. I did some comparisons on the UK Based Age Partnership site and as I qualify as an
"Impaired Life", they claim that JUST Financial Services can get an annuity of approx £7K per annum
- all the other major providers ( SL, Aviva, L&G etc) come in at around £3.8K - so something is
very "off" with Just FS - or am I too cynical ?

So, that's my situation in a nutshell, and if anyone has a view on whether Annuties are better
than Drawdown or vice versa, I'd be interested to hear from you !

Thanks in advance
AI.

[oldapple]

Hello AI and welcome. I’m sorry not to be able to advise and, indeed, have a fairly similar decision to make myself soon. All I did want to point out is that Age Partnership, whom I used to get quotations from, have a minimum charge in the region of £1700 should you use them as your ‘go-between’. I thought this quite expensive.

All the best.

[DrFfybes]

A couple of observations - to get circa £300/month from cash savings there must be about £70-100k?, so the is in excess to the cash ISA?
If so then is there any reason this isn't in a tax shelter, even if it is only Premium Bonds?

Secondly are you still in the Civil service? - Can you take the DB pension early with a reduction? Bear in mind that if you wait for State Pension to arrive then the DB scheme will be taxed anyway. The LGPS allows you to retire and then go back part time in some cases (and I'd expect 'impaired life' to be one of them) so perhaps check your scheme rules.

With an annuity will you need a widow's pension or will the CS one suffice? That £7kpa from £50k sounds like quite a serious impairment uplift At least with drawdown the remainder goes to your Spouse.

There'll be someone along shortly to point out Cash does not preserve your capital as it erodes with inflation . However it is your cash and your risk, so if it makes you comfortable then so be it. We are the opposite, but with DB schemes covering the essentials we can afford to take a risk.

Paul

[xxd09]

What are your income requirements on retirement?
This figure will be needed to plan a way forward
xxd09

[Bouncey]

Are annuities better than draw down?

In my opinion, if you are reasonably financially savvy, and likely to be of sound mind for some time to come, I would operate my own draw down strategy.

To eliminate market risk, construct a Gilts Ladder, maybe 20 purchases spaced at yearly intervals @ £2,500. When you add in the coupons accumulated over the 20 years, you could keep this going for a further 5-10 years.

Which is essentially what the Insurance/Pensions companies are doing with your money, whilst taking their cut.

So you save on that as well as the commission of the annuity introducing party.

[dealtn]

To eliminate market risk, construct a Gilts Ladder, ...

You either don't understand the meaning of the word eliminate, or what market risk means.

[CryptoPlankton]

To eliminate market risk, construct a Gilts Ladder, ...

You either don't understand the meaning of the word eliminate, or what market risk means.

Rather than regularly popping up across the boards with similar terse and disparaging comments, have you considered perhaps using your undoubted knowledge to make more constructive replies? It might make for more convivial discourse.

Just a thought...

[Urbandreamer]

So, that's my situation in a nutshell, and if anyone has a view on whether Annuties are better
than Drawdown or vice versa, I'd be interested to hear from you !

AI.

Are apples better than oranges?

Should we eat pasta or rice?

There really is no sensible answer to the question. Personally, I'm going the draw down route.

I'm exposed to market risk, but avoid inflation and monetary risk.

You may prefer the annuity route. Especially since it is clear that you think highly of cash/money. While I seek to avoid keeping wealth as money, you have done the reverse. Maximizing the portion of your wealth that is kept as money.

If you chose the annuity route you won't find me telling you that you have made the "worse" choice. You will simply have made a different choice than I would were I in your shoes.

Ps, as a civil servant I hope that you are aware that policy would almost certainly half the purchase power of your annuity before you die. The BoE has a remit of 2% inflation, which, were it achieved, would lead to purchasing power halving in 36 years.

[kernelthread]

2% inflation is being optimistic. CPI has averaged 2.7% and RPI 3.6% since 1948. Looking forward from here I think we can reasonably expect inflation to be higher than expected.

[Urbandreamer]

2% inflation is being optimistic. CPI has averaged 2.7% and RPI 3.6% since 1948. Looking forward from here I think we can reasonably expect inflation to be higher than expected.

While true, that's not stated policy.

FWIW, you need 20% more money to buy the same stuff that you did five years ago (according to CPI).
https://www.rateinflation.com/consumer- ... rical-cpi/

My argument is that you should EXPECT inflation as it is policy. That is to say that it is DELIBERATE.
Hence if you plan on living a few years, inflation is something that you should plan for.

[dealtn]

You either don't understand the meaning of the word eliminate, or what market risk means.

Rather than regularly popping up across the boards with similar terse and disparaging comments, have you considered perhaps using your undoubted knowledge to make more constructive replies? It might make for more convivial discourse.

Just a thought...

Apologies, I guess.

[kernelthread]

2% inflation is being optimistic. CPI has averaged 2.7% and RPI 3.6% since 1948. Looking forward from here I think we can reasonably expect inflation to be higher than expected.

While true, that's not stated policy.

FWIW, you need 20% more money to buy the same stuff that you did five years ago (according to CPI).
https://www.rateinflation.com/consumer- ... rical-cpi/

My argument is that you should EXPECT inflation as it is policy. That is to say that it is DELIBERATE.
Hence if you plan on living a few years, inflation is something that you should plan for.

Yes, I agree with that. I also think you should expect more inflation than they officially claim as the target, both because historically that is what has happened, and also because slightly higher inflation benefits those who make policy at the expense of the population at large. Looking at your table, the last entry (Nov 24) is 135.140 and 5 years previously (Nov 19) is 108.549. That is a 24% increase, which works out to just under 4.5% annualized.

[dealtn]

To dealtn:

So, not an apology at all.

I know what eliminate means, I wish I could eliminate you.

Not participating at all in equity markets means not being exposed to its risk. What don't I understand?

That Gilts are also a market instrument with market risk.

[Bouncey]

To dealtn:

So, not an apology at all.

I know what eliminate means, I wish I could eliminate you.

Not participating at all in equity markets means not being exposed to its risk. What don't I understand?

That Gilts are also a market instrument with market risk.

To dealtn:

So, not an apology at all.

I know what eliminate means, I wish I could eliminate you.

Not participating at all in equity markets means not being exposed to its risk. What don't I understand?

That Gilts are also a market instrument with market risk.

Wrong.

Not when held in a ladder to full maturity, and cashflows are certain.

I'm not engaging in a discussion with you of the risks of global nuclear war, or UK government defaults as being market risks.

[dealtn]

That Gilts are also a market instrument with market risk.

That Gilts are also a market instrument with market risk.

Wrong.

Not when held in a ladder to full maturity, and cashflows are certain.

I'm not engaging in a discussion with you of the risks of global nuclear war, or UK government defaults as being market risks.

I'm sorry but you are wrong, and I refer to my earlier response. You have confirmed you know what eliminate means but demonstrate you don't know what market risk is. I'm sorry that the interpretation of my earlier response was considered "terse". But this site is repeatedly littered with false comments and untruths that, at least in my opinion (especially given it derived from another place that had as part of its mantra "to educate").

We could enter into a discourse on whether those cashflows are indeed "certain". (They aren't in nominal terms and certainly aren't in real terms). However holding until maturity doesn't eliminate market risk it means you bear that market risk until that maturity (assuming it comes). A cursory knowledge of the Gilt markets over recent years gives plenty of evidence of market risk in action - and plenty that were "holders to maturity"not just bore that risk but were shaken out and became (unplanned) sellers.

Particularly when new members join this place - usually seeking knowledge and wisdom from those better placed and with knowledge to explain - it is incumbent on respondents to responsibly reply and impart knowledge and not falsehoods. I would go further and say it is also incumbent on others to correct any obvious falsehoods such that the OP and anyone else reading those falsehoods and potentially relying on them as truth aren't mislead and potentially adding to unforeseen risk and outcomes.

I guess that isn't terse.

[vand]

Although I am generally in favour of drawdown, I think there's a solid case to be made for maybe splitting options and putting some into money into annuities at the present, given that rates are much more attractive than they used to be and a 55yo can currently get better than 4% return with 3% annual uplift, which is better than the 4% SWR traditionally used as the base scenario in drawdown backtests

Annuities also become more attractive and make more sense the older you get as they take advantage of mortality cross subsidy.

[Bouncey]

Wrong.

Not when held in a ladder to full maturity, and cashflows are certain.

I'm not engaging in a discussion with you of the risks of global nuclear war, or UK government defaults as being market risks.

I'm sorry but you are wrong, and I refer to my earlier response. You have confirmed you know what eliminate means but demonstrate you don't know what market risk is. I'm sorry that the interpretation of my earlier response was considered "terse". But this site is repeatedly littered with false comments and untruths that, at least in my opinion (especially given it derived from another place that had as part of its mantra "to educate").

We could enter into a discourse on whether those cashflows are indeed "certain". (They aren't in nominal terms and certainly aren't in real terms). However holding until maturity doesn't eliminate market risk it means you bear that market risk until that maturity (assuming it comes). A cursory knowledge of the Gilt markets over recent years gives plenty of evidence of market risk in action - and plenty that were "holders to maturity"not just bore that risk but were shaken out and became (unplanned) sellers.

Particularly when new members join this place - usually seeking knowledge and wisdom from those better placed and with knowledge to explain - it is incumbent on respondents to responsibly reply and impart knowledge and not falsehoods. I would go further and say it is also incumbent on others to correct any obvious falsehoods such that the OP and anyone else reading those falsehoods and potentially relying on them as truth aren't mislead and potentially adding to unforeseen risk and outcomes.

I guess that isn't terse.

So disagree with you.

These known cashflows held to maturity totally underpin the annuities market, enabling insurers/pension providers to guarantee their products. Their guarantees are under pinned by government bond commitment.

If you become a forced seller by selling before maturity, under distressed conditions, then you have sabotaged your own plan. You need to have discipline.

[moorfield]

I'm sorry but you are wrong, and I refer to my earlier response. You have confirmed you know what eliminate means but demonstrate you don't know what market risk is. I'm sorry that the interpretation of my earlier response was considered "terse". But this site is repeatedly littered with false comments and untruths that, at least in my opinion (especially given it derived from another place that had as part of its mantra "to educate").

We could enter into a discourse on whether those cashflows are indeed "certain". (They aren't in nominal terms and certainly aren't in real terms). However holding until maturity doesn't eliminate market risk it means you bear that market risk until that maturity (assuming it comes). A cursory knowledge of the Gilt markets over recent years gives plenty of evidence of market risk in action - and plenty that were "holders to maturity"not just bore that risk but were shaken out and became (unplanned) sellers.

Particularly when new members join this place - usually seeking knowledge and wisdom from those better placed and with knowledge to explain - it is incumbent on respondents to responsibly reply and impart knowledge and not falsehoods. I would go further and say it is also incumbent on others to correct any obvious falsehoods such that the OP and anyone else reading those falsehoods and potentially relying on them as truth aren't mislead and potentially adding to unforeseen risk and outcomes.

I guess that isn't terse.

So disagree with you.

These known cashflows held to maturity totally underpin the annuities market, enabling insurers/pension providers to guarantee their products. Their guarantees are under pinned by government bond commitment.

If you become a forced seller by selling before maturity, under distressed conditions, then you have sabotaged your own plan. You need to have discipline.

I think the OP was probably referring to (changing) interest rate risk, not market risk, which a gilt ladder is usually deployed to ride.

There are many different flavours of risk, none of which are eliminated completely, the two posters can grasp that at least I hope and have been wasting each others with that little spat.

Nothing to see here.

[Bouncey]

So disagree with you.

These known cashflows held to maturity totally underpin the annuities market, enabling insurers/pension providers to guarantee their products. Their guarantees are under pinned by government bond commitment.

If you become a forced seller by selling before maturity, under distressed conditions, then you have sabotaged your own plan. You need to have discipline.

I think the OP was probably referring to (changing) interest rate risk, not market risk, which a gilt ladder is usually deployed to ride.

There are many different flavours of risk, none of which are eliminated completely, the two posters can grasp that at least I hope and have been wasting each others with that little spat.

Nothing to see here.

The OP specifically posed the question

"So, that's my situation in a nutshell, and if anyone has a view on whether Annuties are better
than Drawdown or vice versa, I'd be interested to hear from you !"

I seem to have caused offence by offering my view, one which I think should not be controversial.

There is no risk to the cashflow deriving from either annuities, or the bond ladder held to maturity.

So no, I do not grasp your flavours of risk.

There is of course the risk that inflation will damage value of the income, but that was NOT the subject under discussion.

[dealtn]

There is no risk to the cashflow deriving from either annuities, or the bond ladder held to maturity.

So no, I do not grasp your flavours of risk.

So no risk to your Greek equivalent bond or annuity holder at the turn of the century?

https://tradingeconomics.com/greece/government-bond-yield#:~:text=The%20Greece%2010%2DYear%20Government%20Bond%20Yield%20is%20expected%20to,2.98%20in%2012%20months%20time.

Or in the UK in the 1970s?

On both occasions haircuts on bonds and potential restructurings were on the table - even for domestic holders. 2 of the current topics in the Gilt landscape are concerns the UK public finances and UK economic landscape generally could see a return to the 1970s, and that UK bond yields are higher than comparisons with Europe (including the "basketcase" that is Greece).

Plenty of bonds issued haven't repaid in full, including those issued by sovereigns over time. Many that did were damaged by inflation consequences too. Anyone that is investing, or living off, what is likely to be their biggest financial asset, should be grasping what risks they are exposed to, even iof they are small (currently).