Drawdown & Annuity Combination – Retirement Planning with your Personal Pension
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The focus of how to take an income from a personal pension is very much on drawdown and that really being the only solution. It was George Osbourne that stated in 2014, that no one should have to buy a pension annuity with the launch of pension freedoms. However, and I alluded to this in a previous video that taking a combination of annuity and drawdown can be an effective strategy and we’ll look at that in a bit more detail today along with why the trend away from annuities could be slowly reversing.
Which brings us onto an interesting proposition with the annuity, that we are effectively blending this with the use of drawdown. Potentially with a secure income in place it lends itself the potential for then taking a higher level of risk with the drawdown investments. By securing a level of income we can then potentially replace some of the lower risk investments within our pension with higher risk ones. The combination provides a potentially powerful mix of assets.
And this brings us onto risk. The assets that might be considered low risk investments such as bonds and gilts still carry risk in as much as they can still fall in value, there is still risk to your capital with these investments. And the case for equities is a well-trodden one, we have all see the information relating to past performance, how returns have bounced back after the various falls in value, stats from 1929, 1973, 1992, 2000, 2008 and of course 2020.
But that is exactly that, its historic and as much as we look at that data and all of the information it provides to us in an effort to call what will happen in the future it is still a guess, there are still unknowns, so the call we have to make is one of security and certainty versus one of historical precedent, as in, it happened like this in the past so we assuming it will likely occur again.
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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.
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Have watched a few of your videos now and I like them. Seems to be good information from someone who knows what they’re taking about. Just subscribed and added some videos to my Watch Later list. Please keep putting out this type of content.
Interesting video. My first pension from 30 years ago is a final salary pension that goes up 5% a year. At 65 it’ll pay me a decent guaranteed income. I’ve also put money into private work placed pensions that I’ll put into drawdown. Should mean that I can retire a bit early and still have a lot of certainty of income. Also means that a larger portion would go to my wife should I die. Gives me some flexibility over how I take the money out. Tbh I got lucky with the first pension.
How about this scenario: Let’s say half of LTA is inside a DB the other half is inside a DC (SIPP). At retirement take 25% tax free lump sum of the DC and then move that money across into ISAs and hold in the very same underlying investments as it was inside the SIPP (to suit your risk appetite). This may take a few years depending upon the size of the 25% Tax free lump sum. What was the point of that? Well, as you draw the money out of the SIPP it will attract taxation, but once it’s been placed inside an ISA it’s protected from tax forever and you have the benefit of compound interest on the underlying investments. This gives you a very flexible way to control your tax burden each year. The tax on your DB payments and DC drawdowns in any given year is unavoidable. However, should you need some additional income you have the choice to take it from the ISA to improve tax efficiency.
Interesting could you do this example but with bonds instead of annuity. The reason I ask is because Warren Buffet says when he dies his instructions are for his wife is to have 90% invested in the S&P 500 and 10% in bonds . Also Jack Bogle advocated for 50% bonds and 50% equity both predicting a growth rate of 4% after inflation for the next decade. It would be nice to hear your thoughts on these approaches and are they realistic and see how Mr Pickles gets on.
Thanks Ed. I would like to see this example done for a married man if there is such a thing
Sir being on universal credit is taking a taxable amount from my pension plan to top up my savings which will still be below £6k acceptable to do so because am on a low income which is hardly enough to live on
Brilliantly done very useful
Could you talk about the kinds of things people should consider if they have a DB pension and a SIPP? Presumably presence of a DB pension tips the balance in favour of ISA’s over SIPP’s?
With drawdown is it possible to leave your tax free lump sum invested to take later?
Scenario 1 – living abroad taking the taxable part and returning to the UK later years to take the tax free part (my understanding is most countries would tax the tax free part since the UK didn't)
Scenario 2 – taking taxable drawdown up to personal allowance and then taking tax free lumo sums when needed to reinvest in ISA's.
Really enjoyed this video. I have a drawdown and annuity plan.
As always some real interesting stuff. Great work. Love your videos.
I like your Subscribe button as well. 🙂
Annuities = gifting insurance companies. Simps buy Annuities, smarts hold equity in insurance companies.
Thanks Ed. I hadn't realised that just by commenting on videos, channel owners were able to view my spreadsheets on my hard drive!!
I say this because I was struck by how similar Mr Pickle's plan was to my own. Let me explain…
Similar to Mr Pickles in the first example, I am planning to draw my state pension at age 66 and 9 months (in 2027) but I am already "retired" / living off the rental profit from a small buy-to-let portfolio and this will be topped up by my wife's state pension from next April.
I have concluded that as my SIPP is so small, I may as well throw caution to the wind and invest it all in equities and then if I am gone before 75 whatever is left of it can pass free of IHT to my children, but if I make it to just before I am 75 I will then decide whether to convert it to an annuity(but only if we need more income) OR hopefully let it remain invested so that it can pass on to my children for them to drawdown outside my estate, whilst alternatively also being available to contribute towards care fees/ an immediate care fees annuity, if required (hopefully not required).
So basically, prior to watching this video, I planed to draw the state pension at 67 (ish) and decide at 74 whether to take an annuity at 75.
I was very, very disappointed to learn that the annuity at age 75 would only pay out at 5.7%, but maybe annuity rates will increase over the next 14 years?
Great video ed pleased to see mr pickles is back my dad retired with an annuity at about 54 it was a pretty good amount every month he passed away at 78. Then that was that and it stopped. For me ive just started looking and thinking about retirement
I've been going round and round trying to figure out a stratgey for early retirement and using a set of buckets of different risk levels to smooth things out. I keep coming back to considering Lifestrategy 20 for my near inflation-tracking investment, protected by a cash buffer. Anything that has reasonable returns has some volatility and Lifestrategy 20 seems (from past performance!) to be less volatile/more consitent than a lot of other options and recovers twice as fast from crashes/corrections than funds with more equities. Plus I will have a couple of years cash buffer to smooth it out more.
I will look at my combined pot on a spread sheet and try to work out some future scenarios based on your examples here, thanks.
Presumably the income @ £20k per annum is gross and subject to taxation ?