Income in Retirement: Savers Prefer Drawdown to Annuities

Many investors are confident they're saving enough for retirement, but with annuities relatively expensive they prefer income drawdown strategies to access their savings

Holly Cook 21 May, 2015 | 7:30AM
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A survey of savers on the streets of London has revealed that most are relatively confident that they're saving enough to fund their imagined retirement lifestyle. Individuals ranging from a young man in his early 20s to a retired couple in their 70s interviewed by earlier this month said that on the whole they didn’t fear that they would run out of money in retirement.

Encouragingly for retirement industry professionals, those in their 30s and 40s felt that by saving in company pensions they were in control of their finances and their future. Furthermore, most said they would try to be sensible with any cash withdrawals they made at retirement age and would resist the temptation to squander it on luxury items. Property was a common theme for savers to spend their hard-earned pension cash on, with several individuals saying they’d like to buy a property to rent out to generate additional income, and others preferring to buy a property at home or abroad to live in.

Some confusion reigned, however, over the new rules brought in by the previous coalition government that allows individuals to access their entire pension pots on retirement, with most believing that the first 25% of assets could be withdrawn entirely free of tax while everything after that would be subject to a 40% tax charge. Clearly, further education on this matter is needed to ensure each saver is aware of their personal circumstances and the tax implications of their various choices.

When it comes to accessing one’s savings, the majority of those surveyed said they would opt for an income drawdown strategy that would see them keep their pension savings invested in the market, while each year they withdrew a slice of their assets to fund their lifestyle. Annuities were seen to largely be too expensive – paying out an annual cash amount that was deemed to small relative to the total size of the pension pot, and the effort involved in having saved up to that point.

But annuities still have their place, Morningstar retirement analysts believe, as they provide security in knowing the exact payout each year for the remainder of your life. A preferred strategy would be to buy an annuity that will cover the essentials, such as utility bills and weekly food shopping, so that the individual can sleep easy knowing that whatever happens in the stock and bond markets, they can always afford to pay their living costs; and to access the remainder of one’s pension via a drawdown strategy that can be used for all other living expenses, international travel and luxury purchases.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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