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.