Drawdown or Annuity which is Best - Retirement Planning UK

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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:

🗒 Please note:

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.

#pension #retirementplanning #financialplanninguk

[EdmundBaileyUK]

Thanks as always for watching!! 👍

And please let me know should you have any questions or comments. And definitely let me know whether scribbling on a piece of card is useful or not?! 😀

[garypinnock]

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⭐️⭐️⭐️⭐️⭐️

[stephenhedges]

Thanks Edmund, very informative once again

[johnristheanswer]

I retired at 55 and annuity rates offered were ~3% and losing access to the pot seemed uncomfortable. 30 odd years of life just to get my money back ( simplified maths I know ) . I kept my hands on the pot and drawing 3% from dividends has meant I have best of both worlds. Seemed a no brainer to me.

[michaelholmes]

Very sound credible advice, very happy to have access to your expertise Ed👍

[davidbiran]

A useful exposition of the annuity/drawdown conundrum, simplified but not overly so.
At the moment the issue of sequence risk is all too real (I have seen my total portfolio reduce by about 11% in the past 4 months).
Your scribbles do help make things clear for those who might have issues with understanding spreadsheets!

[FrankMike]

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...?

[TVRCreators]

Very good and interesting video as always, awesome stuff. :)

[simonbuller]

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!

[johnharvey]

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.

[Pulpdiction]

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.

[tim.lawrence]

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…

[gaza]

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.

[DKNW]

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.

[michaeli]

Well presented and very informative. I’ve taken the drawdown option, but not drawn anything and don’t intend to . I have my OAP, revenue from rental properties and saving to give me a very good lifestyle. When the liquid assets run dry I’ll sell a rental property, and as last resort take some cash from my home, equity release. I want to keep my pension pot out of my estate. The government is far to profligate, avoiding IHT is a key priority . Id rather my family have the pleasure of spending it wastefully 😂.

[robertp.wainman]

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

[marktaylor]

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?

[Tensquaremetreworkshop]

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.

[tonygoodin]

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.

[lindamurray]

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?