‘Should we choose an an­nu­ity or draw­down?’

The Daily Telegraph - Your Money - - YOUR MONEY -

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:

Your name, age and tele­phone num­ber (we will not share this with any­one)

Your main fi­nan­cial goals

Your cur­rent in­vest­ments, in­clud­ing cash and prop­erty

You must be will­ing to be pho­tographed for the ar­ti­cle an­nu­ity or a life­time an­nu­ity.

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

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.