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Using Income Drawdown to get more income than you may from an annuity.

For those customers willing to take investment risk, income drawdown provides an opportunity where you could receive considerably more income than you would from a conventional annuity. Our case study below demonstrates how a couple could get 38% per annum more using income drawdown over an annuity.

When it comes to using your pension savings to provide you with a retirement income, quite naturally most people want the most they can get. A conventional annuity will provide you with an income based on the annuity rate at the time you take it – most importantly an annuity is guaranteed to provide you with an income for the remainder of your life.

Furthermore your specific lifestyle and / or medical history could see you receive an enhancement to your annuity income. We have full details on how to get an enhanced annuity on this website. You should always consider that an annuity may be the most suitable product for your needs.

For some people their need for income dwindles as they get older. This is typically due to a reduction in holidays, going out and the reduction of a more active lifestyle. Many people take the view that they would be better served by getting the most out of their pension fund while they are younger, even if it means they take the risk that at some point in the future their income will fall.

This flies in the face of the argument of linking your annuity income to an index such as the Consumer Price Index (CPI) where the income increases each year. The aim with this approach is to maintain the spending power of the annuity income. Many customers nevertheless reject index linking their annuity income as the income you receive when you first start the annuity is considerably lower than a level annuity that doesn’t increase. Based on many recent cases, it normally takes 15 years or more for the income you would receive from an index linked annuity to catch up with a level annuity.

Given that, in the majority of cases, the remainder of your pension fund after tax free cash will have limits on how much of it you could receive each year as income, many people take the ‘bird in the hand’ approach and prefer options that see them receive the majority of their pension fund returned to them as quickly as possible.

 

 
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Annuity or Drawdown ?

If you are prepared to take some investment risk, income drawdown could offer many additional benefits including more income in retirement.

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As an example, based on quotes produced on the day this article was created, a 65 year old customer with £100,000 to buy an annuity on a single life basis will receive £6,006 per annum guaranteed for life. This means that they will have to be almost 82 before they have received £100,000 back in annuity payments.

Conversely the same customer using Income Drawdown could take a maximum annual income of £7,320. While this amount isn’t guaranteed for life and could go up or down over time, if the annual payment was maintained then they would have received the £100,000 back before they were 79.

There are other potential benefits to the customer using Income Drawdown as well a number of risks that need to be considered. These are not discussed in full on this page, but an explanation of Income Drawdown including its risks and benefits is given to every customer who requests an Income Drawdown quote. To get your free no obligation quote and information pack use the get quotes now button on the panel on the right or call 020 33 55 4827 now !!

More income from Income Drawdown Leo Income Drawdown Case Study Income Drawdown Case Study
It is Leo’s 65th Birthday and he is still in fine health. After taking his tax free pension lump sum he has £100,000 to invest into some form of pension plan.
 

While he likes the security of an annuity he understands investment risk and is also concerned about an annuity company keeping his fund should both he and his wife die relatively young.

On a single life basis he is offered an annuity of £6,006 per annum, while the Income Drawdown contract offers him a starting income of £7,320. He enquires what he would receive if he builds in a 100% benefit for his wife who is the same age as Leo.

This would see his wife receive the same annual income from an annuity as Leo should he die before her. By including his wife the annuity payment would drop from £6,006 to £5,287 per annum.

With the Income Drawdown the maximum starting income remains at £7,320. Should Leo die before his wife, she would receive any money remaining in Leo’s fund to use to buy a retirement product in her own name. She could even take it as a lump sum but it would be liable to tax of 55%.

Leo decides to take the income drawdown option, and he decides to take the maximum starting income of £7,320 per annum. This comes directly from the £100,000 so he needs to manage the remaining fund that will stay invested – typically in funds managed by a fund manager. He decides to use our Governed Retirement Income Portfolio range, where all the investment decisions are taken for him.

Leo passes away after he has been in the drawdown for exactly 10 years. At this point he has achieved growth of 8% per annum on the residual fund. After income, costs and charges the fund is now worth £87,522. This passes to his wife.
Leo’s wife is still in good health. She is far more cautious than Leo and prefers the security of an annuity. She is able to convert Leo’s remaining fund into a guaranteed income of £7,107 per annum. While this is slightly less than she was receiving from the Drawdown with Leo, it is nevertheless £1,820 more than she would have got, had Leo selected the annuity with 100% spouses benefit.

Assuming Leo’s wife lives for a further 10 years then the table below demonstrates they have been £38,530 better off in this scenario.

 
 
  
Joint Annuity
Income Drawdown & Annuity for wife at 75
£ Difference
%
  Leo to age 75
£5,287
£7,320
£2033
38%
  Wife to age 85
£5,287
£7,107
£1820
34%
  20 Year Value
£105,740
£144,270
£38,530
36%
 
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There are many different uses for Income Drawdown which we would be happy to discuss with customers on a no obligation basis. If you would like a comprehensive guide to income drawdown please use the panel of the above right to request income drawdown quotes and we will send everything direct to your email account.
None of the scenarios and figures above can be guaranteed. Annuity quotes have been taken from the Assureweb research tool and income drawdown quotes provided by Scottish Life. All quotes were produced on the day this article was published - 17th October 2013
     
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