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Annuity V Drawdown
Annuity v Drawdown, interesting? But hardly the FA cup!

The current economic conditions make considering your retirement options even more difficult than 5 years ago. Even then, these once in a life time decisions were far from easy to make.

So why is it more difficult today?

The effect of the global financial crisis has driven down interest rates to an all-time low. The Government's Quantitative Easing (QE) together with the downgrading of many European countries' sovereign debt has increased the value of our own Gilts and subsequently reduced their yield to maturity (return available). As Annuity rates are generally determined by the yield on Gilts with 10 years to maturity they too have fallen to historic low levels.

Add to that the continued increase in life expectancy and the European rules on gender equality, together these factors have pushed down the returns now available on annuities.

The Government has also taken away the requirement to buy an annuity at age 75, especially favouring people with a pension drawdown plan. This has resulted in fewer annuities being purchased as investors are hoping their families may benefit from the improved death benefits in drawdown.

If you are looking soon to make your final retirement choices, we would recommend that you seek advice including completing an Appetite for Investment Risk questionnaire before making your choices.

Understand the changes before you act!

If you add to that the creation of flexible drawdown, which allows people to withdraw their pension pot without ever buying an annuity, this has further reduced the funds being invested in annuities.

Continued changes to the level of income that can be taken from a Capped Drawdown plan was not simplified with the introduction of Flexi-access drawdown in 2015.

 

Those with Capped Drawdown are still limited to an income of 150% of the Government Actural Department's (GAD) rate which is around 1.5 times the annuity rate. Should the value of your pension fund fall or the GAD rate be lowered, you could find that your income will be reduced.

Flexi-access drawdown was introduced with much fanfare to celebrate pension freedom. On paper if creates a raft of options for investors including the ability to take your entire pension fund in one go. In reality you can't draw all the funds as you may lose benefits if your don't have much pension provision or you will end up paying vast amounts income tax if you do have a large pension.

However, you are no longer limited by a pension income ceiling with these new freedoms. We have seen some people taking out tax- free cash to reduce their mortgage commitments, but, care must be taken with starting an income from flexi-access drawdown as your pension contribution annual allowance will be reduced if you take an income.

Many people are claiming that annuities are dead. This would be true if interest rates stayed low forever, which is unlikely to be the case. Annuity rates are linked to the interest rate charged to the UK to borrow money. Although these have been historically low, there is no reason to believe that future increases in interest rates will not see a switch to annuities in retirement. After all annuities are typically simpler and cheaper than a drawdown schemes. Developments in annuity products are already seeing improved death benefits and alternative retirement income options enter the markets.

 
 
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