DIY route to a better pension is not without risk

There was a good article in The Times today explaining Income Drawdown as an alternative to purchasing an annuity.

Income Drawdown entails keeping your pension plan invested and drawing income from it within prescribed rates (Government Actuary’s Department or GAD rates).

There are a number of reasons why is route might be desirable particularly at a time when an annuity seems a relative poor value option (although this is by no means always the case).

The GAD rate allows an income withdrawal that is some 120% of the annuity rate that would apply if it was purchased on a single life, without any survivor’s benefits.

So Income Drawdown might allow a higher level of income than an annuity purchase and be chosen because of that.

Whilst we would always want to avoid referring Income Drawdown as “annuity deferral” essentially it does do that.

So it might be realistically expected that by deferring buying an annuity, for say five or ten years, a future annuity rate might be higher.

However, this cannot be guaranteed because of course none of us can predict future Gilt yields to which annuity rates are closely correlated.

Further downward pressure on annuity rates should not be ignored; greater life expectancy for the population at large, regulatory pressure for annuity providers to set aside more capital and (somewhat strangely) people with an under average life expectancy pay taking them sleeves out of the general annuity pool (it means other don’t benefit from the profit associated with their earlier death!).

Income Drawdown is not without risk so whilst there can well be an upside consider also the following warnings;

* The capital value of your Income Drawdown plan maybe eroded by a combination of lower investment returns, charges and inflation and of course the money that you extract from it as income;

* Investment returns may be less than those shown in any illustration that you receive from the Income Drawdown plan provider;

* Your Income Drawdown illustration may make assumptions about the future levels of annuity rates and in practice these assumptions may be too optimistic and future annuity rates could be worse;

* High levels of income withdrawal may not be sustainable because the fund value may be eroded by withdrawals particularly if at the same time as withdrawals are being made investment returns are poor.

To find out more, you can download our free to guide to the retirement income options maze:

A Guide to the Retirement Choices & Options Maze

Alternatively, do get in touch to discuss your own income options at retirement in more detail. We offer an initial meeting which is at our expense and with no obligation.

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