Drawdown or annuity which is Best – Retirement Planning UK
We have a comparison of drawdown versus annuity and the pros and cons of each. This probably can be best summarised by saying that we are pitting guarantees and security versus flexibility and superior death benefits, but we’ll delve a bit deeper into both.
And to be clear the two products aren’t mutually exclusive and where I see it working well is a combination of both annuity and drawdown together and both products bringing something different to the table. Also as previously mentioned in my other videos there is the ability to take fixed term annuities which sits between both annuity and drawdown and can be a good bridge between those products. However, for this video I’m keeping it super simple and we’ll just focus on annuity and drawdown.
Link to the Government Money Helper Website:
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The information provided is based on the current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on my understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances.
This channel is for information and education purposes only. Any information or guidance given does not act as financial advice. Please consult a financial adviser if you are unsure in anyway.
Keep in mind that the value of your investments can go down as well as up, so you could get back less than you invest.
⭐ My aim is to provide education and guidance to help individuals understand pensions, investments and protection.
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Fantastic video. What was the 'capital value' risk of drawdowns 8m29s, I didnt fully understand what was meant by that even though Ed was using his amazing sharpies!
As always Edmund, another excellent and thought provoking video. I hadn't realised that you can 'slice' the pension pot vertically to take a 'bit' of the 25% tax free element together with some taxable element. Also, I read somewhere (though clearly it may have been an error), that whatever you take from your pension pot, 75% of it is taxable. So in other words, you can't take a 'clean' 25% of your pot tax free and be untouched by the tax office. Your illustration suggests otherwise…?
Very good and interesting video as always, awesome stuff. 🙂
Hi Edmund really good description, maybe real scenarios may also help, like comparing annuity with the worst growth experienced in the last 10, 20 30 years etc. Also any alternatives available worth considering, property ?? Any other differences i.e. funding for potential care and the impact that may have.
Hi, really like your videos, great advise and easy to follow, a few things that aren't discussed in a lot of scenarios though are how long realistically you need your money to last and it would be good if you could show some examples in another video around real world life expectancy, from ONS web site:
Life expectancy at birth in the UK in 2018 to 2020 was 79.0 years for males and 82.9 years for females;
Life expectancy at age 65 years was 18.5 years for males and 21.0 years for females; these estimates are very similar to those for 2015 to 2017
So for the average retiree at 65 their money only realistically 'has' to last for up to 21 years.
I guess this is why the emphasis needs to be on making plans to retire as early as people can afford. It also means some key considerations for annuity planning, eg if the payback, albeit being index linked, is more than 21 years then for most people it's not a great option.
Hi again, I’m 51, hoping to retire @ 60, I’m im my workplace pension, I contribute £1000 a month to be set aside & my company contribution is 10%, my workplace pension which is taken directly from my wages @ the end of each month, my workplace pension is with Standard life & Ive seen my pension plummet by £10,000 over past few months due to war in Ukraine or that’s roughly when it started to drop drastically, I’m sure that due to many workplace pensions are adjusted & linked to stock markets which are very unsteady @ present, is it just a storm we will have to sit out or do you think that it’s best to seek advice from a financial perspective as to see whether my money can perform better elsewhere? Regards Gary, a keen subscriber & follower of your channel⭐️
Thank you so much for explaining pensions, drawdown & annuity to, you make it simple to take in & digest & understand & for that I’m grateful, I’m a true subscriber to your channel, take care & look forward to your next video, regards Gary⭐️⭐️⭐️⭐️⭐️
Edmund – great videos. Thank you for setting things out so clearly. I have a question as to when the tax free amount is calculated. If your pension pot is £1m when you retire at 60, the tax free element would be £250k. If you decided not to draw from the pot until aged 65, lets assume the pot might then be worth £1.1m. At this point the tax free element would be £275k. Is the tax free amount calculated at retirement age, or when you first make a withdrawal from the fund?
I am 51 and will be retiring very soon through Ill health, this is not terminal as in 1 year life expectancy, more likely to happen in the next 5 to 10 years. I am currently looking at pension drawdown through all my pensions, I have decided not to touch my super annuated one through my work place as it doesn't hold very much about 8 years. My 3 private pensions collectively have a significant amount in them. I am thinking of claiming my 25% drawdown on the three pensions, 1 to clear debt, a trust deed thanks to an ex partner. 2 to enable me to achieve bucket list while I am able, and lastly to gift a small amount to a family member. I have to be careful of savings and not exceed £6000. Would I be able to gift a sum of money to the family member from the insurance company, or does it have to go into my bank account? And does paying of a trust deed get taking into account when taking a drawdown?
Very clear and interesting video. Having looked at this and having a small PPF pension and will have a state pension in the near future giving a degree of certainty, I went for drawdown with my main pension. It’s simply the maths of Annuities that is the problem (I.e excessive profits for the insurance companies). The average death age for males in the UK is around 80 so a retirement at 65 leaves 15 years (I know that if you reach 65 you may push the age of death a little on average), however 5% is 1/20 so even if you can find an annuity that pays 5% the pension companies on average will get these 5 years plus the whole of the capital. If the annuity is 3% or 4% it just gets worse. I have found the long term ISAs and Sipps are paying between 4% – 5% interest so the return is the same without touching the capital. I understand there is a risk that interest rates may fluctuate but the current balance between the two options seems too wide. As you say having both is probably the best option of a small annuity plus state pension just in case.
Indexed linked curve should have gone upwards to (I assume) a value at, or higher than, the non indexed linked curve? I would personally chose the non indexed linked product – after all, if you want, you can always re-invest the difference.
Can a partial drawdown have the 75% part left in the pension as a crystallised portion?
The basic rules with insurance statistics are quite simple: When you are young say age 20 your chances of dying before say age 80 are quite high, so they sell life insurance to make huge profits. When you are older say age 60 your chances of living until say age 80 are much better than when you were age 20, so they sell annuities to make huge profits. I summarise this as 'Insurance companies would have you think that at age 20 you could die next week, at age 60 you should consider yourself immortal.'
Interestingly my Grandmother aged 45 was persuaded to take out insurance cover on my Grandfather aged 50, when he died within a month the insurance company didn't want to pay out. The latest insurance industry policies would now only return the premium paid..
Always divide 100 by the interest rate offered on an annuity and add the result to your current age. Chances are you'll have to outlive any previous recorded oldest member of your family in order to just get your money back. If you think you're going to set a new family record for longevity buy the annuity. Unless of course you'd have to beat a World record to get your money back, which is entirely likely. Insurance companies main aim is to make profit for their shareholders and to pay mega bucks executive salaries.
They're far removed from the benevolent societies that they grew out of.
Nicely explained video. I suspect many who are taking too high a percentage of withdrawal could have serious problems if and when a severe stock market crash takes place. I'm surprised how people who wouldn't consider themselves 'gamblers' – are prepared to take a real 'risk' with drawdown…..
I plan to tax my pcls from my DB and in stages, my tax free amount from my DC, and put them into stocks and shares ISAs.
I will then drawdown tax free money from ISAs, and leave the taxable amount to grow in equity, as an inheritance.
Minimising tax paid.
How does that sound?
I'm interested in the current climate as to what level of growth on investments should one use to plan. Historically advisers used 7% and regularly achieved higher. Is that still the case or should the sights be set lower at say 5%. Or should it be more bullish and assume that any losses today will be regained significantly once the world gets "back to normal" again.
You can split between these not only at the start, but move to annuity over time, getting a higher return from increased age.
It is logical (although we may not be) to leave this world with £0 in the bank. Annuities are the simplest way to achieve this. If one's fund is reducing, it makes sense to transfer the remaining to an annuity at a calculated point. If it is going up, spend your time spending more!
A balanced combination is a way of hedging the risks- investment do well, you benefit from that part. Investments do poorly, you are covered by your annuity.
Personally, having an annuity that covers the base costs of living and investments that pay for the 'jam' is a sensible route. Whatever happens, penury is avoided.
Excellent video that simply explains the differences between annuity and drawdown. The big unknown that makes one more riskier than the other is how long we will live. If you die shorty after taking your annuity then the insurers receive a windfall benefit from all of your years of hard work and saving. On the other hand if you opt for draw down and you live to a ripe old age then you run the risk of your pension pot running dry and leaving you with no income for your remaining years.
Are there any regulations with regards to your spouse or children etc getting part of your annuity back if you die shortly after taking your pension or is it a case of once you die you loose all that you have paid?
If you were in ill health with a high likelihood you will die early, then drawdown would be the best option as you are unlikely to spend all of your pension savings and you will have something to leave to your loved ones.
Are you able to comment on the above?
Thank you…
Edmund great video and the “scribbles” are worthwhile in my opinion. Could you clarify something for me, I know the 25% from draw down is tax free as you state but I thought the remaining 75% was taxable come what may however I think you say that if you continue to draw that 75% and manage to keep it below your personal allowance then that to would be tax free, is that correct? Many thanks
Thanks Edmund, very informative once again
Useful video Edmund.. I have been thinking about the tax implications of pensions and ISAs. I am retiring before long and plan to move to Australia. I know that if I am in Australia for tax purposes I have to follow Australian tax law (and there is a 'no double taxation' treaty) but this implies that Australia wouldn't recognise the 25% tax free element. so I assume it may be better for me to take all of the tax free element when resident in the UK? I would then have to pay capital gains tax on subsequent growth of that investment in either country but better than losing it altogether? Same challenge with ISAs (in that the tax free wrapper wouldnt be recognised?)
Great presentation!