‘Should we choose an annuity or drawdown?’
At the age of 63, Robert Murray knows it is too late to add much more to his pensions before he retires next October. He currently earns £23,000 a year as an estate manager at an assisted living complex in Margate, Kent, although for much of his career his income was significantly higher – £98,000 at its peak.
Mr Murray left the “corporate world” in 2006, downsized and moved from Oxfordshire to Kent. He and his wife, Pat, 65, reduced their outgoings and moved into a fourbedroom newbuild home they bought for £330,000 and is now worth £450,000.
“I was very pleased with my decision to downsize. However, as my 65th birthday looms, I’m beginning to think I should have done more to fund our retirement,” he said.
His pension pots are worth around £231,000, in addition to a company pension that pays £2,110 a year. However, Mr Murray has just £1,000 in non-pension savings, so plans to take a £20,000 lump sum to bolster this. He also wants to know whether he should opt for an annuity or drawdown. Annuity rates are poor but Mr Murray has no experience of investing and describes himself as cautious. The household’s outgoings are £1,200 a month, falling to £800 when he pays off his car next year. Murrays’ ages could expect a jointlife level pension of £7,160 a year. Alternatively, they could use their remaining pension capital of £173,250 to buy an annuity that pays an income starting at £4,752 and increases by 3pc each year.
Annuities are quite inflexible. They generally cannot be changed once purchased and could involve paying a premium to provide Mrs Murray with a pension that may never be required if she dies first.
A pension annuity only in Mr Murray’s name would pay around £8,567 per year, or £5,859 a year if the payment rose by 3pc annually.
The alternative is to consider “flexiaccess drawdown”, which involves keeping the pension pot intact, investing it and drawing an income from it. It involves investment risk.
However, Mr Murray’s core income requirements are already met, which reduces the risk. It also has the benefit that there would be no need to accept a lower income in order to provide for Mrs Murray as the pension pot is still theirs. Mrs Murray could inherit the fund should she survive her husband and there is also still the opportunity to purchase annuities further down the line.
Mr Murray’s pot could reasonably cope with withdrawals in line with the inflation-linked annuity rate of £4,752 per year. Would you like a Money Makeover? If you’d like to (as much detail be considered, as possible please email, please), details with the of any debts header “Give (including me a Money mortgages) Makeover”, and how you to money@ would describe telegraph.co.uk your attitude and provide to investment the following risk information:
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However, the annuity would not be index-linked and as inflation rises its value will soon erode. Mrs Murray would also get only 50pc of the pension, so I wouldn’t recommend it.
An index-linked annuity is an option that would meet Mr Murray’s basic needs, but leave him very tight.
Drawdown would give him a good level income, potential for aboveinflation returns and ability to leave the full pot to his wife.
However, it would carry a great deal of investment risk and given his cautious nature and circumstances I don’t think he can afford the level of risk involved.
A temporary five-year annuity with a fixed income and a guaranteed return of capital could provide him with an income of £5,462 a year from a fund of £153,250.
At the end of the term he would get back £132,062, which he could use to buy another annuity.
As he will be five years older he will be able to obtain a higher annuity rate; he might even be lucky and find that annuity rates generally have risen in the meantime.
Mr Murray could invest the excess in a stocks and shares Isa. Both he and his wife have allowances of £20,000 this tax year.
I’d suggest Vanguard’s Isa and opt for its UK Equity Income fund, which comes with risk but should provide a decent level of income in the long term – and costs just 0.4pc a year.
This couple should have enough to make ends meet in retirement but don’t know the best way to take an income from their savings. By Amelia Murray ‘Given his cautious nature I don’t think he can afford the risks of drawdown’
Robert Murray’s 65th birthday is looming, and he wants to get his retirement finances in order and bolster his savings