Thanks as always for watching!! 👍 And please let me know should you have any questions or comments. And definitely let me know whether scribbling on a piece of card is useful or not?! 😀
I enjoyed the diagrams. One thing with the tax free lump sum I never understand, is it a one off deal i.e. on your £100k example you can take up to £25k tax free but once you take any amount that is it for tax free allowance or can you split it up e.g. 5 x £10k over 5 years?
Thanks 🙏 And no it’s not a one off, it’s only used up once all of the tax free cash has been taken. So every time you move more of the fund to drawdown it crystallises more of the fund until all of the fund has been crystallised and the tax free cash taken. Hopefully that makes sense or maybe I should try and explain it in a video. 🤔
@@EdmundBaileyUK I for one would appreciate a video on this topic including crystallising as I’m not sure how the overall value is calculated (and can therefore work out what the total tax free amount is) if you have a pension pot that can still be increasing (or decreasing).
@@EdmundBaileyUK Hello, I would like to swap my pension for annuity , but I live in the UK and I’m on disability benefits. Will I receive pension credits to top my pension? I will only receive £16.45p a week if I choose to collect my annuity now.
Thank you so much for explaining pensions, drawdown & annuity to, you make it simple to take in & digest & understand & for that I’m grateful, I’m a true subscriber to your channel, take care & look forward to your next video, regards Gary⭐️⭐️⭐️⭐️⭐️
I retired at 55 and annuity rates offered were ~3% and losing access to the pot seemed uncomfortable. 30 odd years of life just to get my money back ( simplified maths I know ) . I kept my hands on the pot and drawing 3% from dividends has meant I have best of both worlds. Seemed a no brainer to me.
Thanks for sharing John. Certainly taking an annuity at 55 would be very/too early. I would have concern for some Individuals especially later in their retirement that they aren’t protected to the downside.
@@EdmundBaileyUK Your steady stream of vids are always well balanced and thought provoking. I feel I'm on the right side of this one. Keep up the good work.
A useful exposition of the annuity/drawdown conundrum, simplified but not overly so. At the moment the issue of sequence risk is all too real (I have seen my total portfolio reduce by about 11% in the past 4 months). Your scribbles do help make things clear for those who might have issues with understanding spreadsheets!
Thanks so much David!! 🙏🙏 I find it hard to know sometimes where to pitch it and how much detail I should use. But absolutely seq of returns is very real and we have become accustomed to sharp recovers, which historically hasn’t always occurred at least certainly not prior to the 1980’s.
Well presented and very informative. I’ve taken the drawdown option, but not drawn anything and don’t intend to . I have my OAP, revenue from rental properties and saving to give me a very good lifestyle. When the liquid assets run dry I’ll sell a rental property, and as last resort take some cash from my home , equity release. I want to keep my pension pot out of my estate. The government is far to profligate , avoiding IHT is a key priority . Id rather my family have the pleasure of spending it wastefully 😂.
Thanks so much Michael! 🙏🙏 I’ve been thinking about setting up a blog as I think some of this stuff works better in written form so might need your expertise to assist!
As always Edmund, another excellent and thought provoking video. I hadn't realised that you can 'slice' the pension pot vertically to take a 'bit' of the 25% tax free element together with some taxable element. Also, I read somewhere (though clearly it may have been an error), that whatever you take from your pension pot, 75% of it is taxable. So in other words, you can't take a 'clean' 25% of your pot tax free and be untouched by the tax office. Your illustration suggests otherwise...?
Thanks for the kind words Michael. Absolutely, it’s incredibly flexible and yes you can just take the tax free cash and leave the residual 75% taxable portion invested and in the pension.
You can split between these not only at the start, but move to annuity over time, getting a higher return from increased age. It is logical (although we may not be) to leave this world with £0 in the bank. Annuities are the simplest way to achieve this. If one's fund is reducing, it makes sense to transfer the remaining to an annuity at a calculated point. If it is going up, spend your time spending more! A balanced combination is a way of hedging the risks- investment do well, you benefit from that part. Investments do poorly, you are covered by your annuity. Personally, having an annuity that covers the base costs of living and investments that pay for the 'jam' is a sensible route. Whatever happens, penury is avoided.
Absolutely, it’s interesting that the starting point in the majority of cases is that annuities are poor value. However the value is in the guarantee and certainty. Thanks for the comment Mike and I hope that this finds you well!
Very clear and interesting video. Having looked at this and having a small PPF pension and will have a state pension in the near future giving a degree of certainty, I went for drawdown with my main pension. It’s simply the maths of Annuities that is the problem (I.e excessive profits for the insurance companies). The average death age for males in the UK is around 80 so a retirement at 65 leaves 15 years (I know that if you reach 65 you may push the age of death a little on average), however 5% is 1/20 so even if you can find an annuity that pays 5% the pension companies on average will get these 5 years plus the whole of the capital. If the annuity is 3% or 4% it just gets worse. I have found the long term ISAs and Sipps are paying between 4% - 5% interest so the return is the same without touching the capital. I understand there is a risk that interest rates may fluctuate but the current balance between the two options seems too wide. As you say having both is probably the best option of a small annuity plus state pension just in case.
Thanks so much for the comment John. And I’d certainly agree it would be interesting to establish what margin or return the insurers make on annuities, I’ve not seen anything specifically alluding to excessive profits, it would be good to know what margin they do make! I think what’s tricky is that it’s easy to create assumptions that will create greater returns than an annuity, so really yes against most individuals assumed returns will always be positive which may or may not be the case. I think for some situations the risk is justified but for some the risk isn’t worth it for the attempted return, kind of akin to picking up pennies in front of a steam roller.
@@EdmundBaileyUK Thanks, I think when looking at annuity profits it’s not about individuals but the average. It’s clear with annuity products individuals who may die early will lose out and those who live longer who will gain. This doesn’t affect the pension company as they work on the average and unless my maths is wrong 5% is 1/20 and on average starting at 65 we won’t live for 20 years. Given the pension provider keeps the capital. if they can obtain 5% on your capital from the markets they only pass this onto you for 15 of the 20 years so they keep the 5 years of interest plus all of the untouched capital. Sounds good for them, but they do have some very expensive offices and lots of staff to support and the money has to come from somewhere, so they may not be making excessive profits just not giving us the money. I asked my late brother who worked for a pension provider to raise this at a company meeting and he said it didn’t go down well with management. However even if we are not getting all of the annuity return we should, I agree that if you opt for a drawdown product having some annuity pension in addition to your state pension to reduce your individual risk is very sensible. I actually asked my financial adviser what spending profile did they see in their 80 to 85 year old customers and they said spending reduced significantly at this age profile even when money was still available so I pitched my annuity plus state pension at this reduced spending level so even if the drawdown didn’t perform or ran out I would have sufficient. You can endlessly speculate on the correct balance of risk v income but in the end the real issue is living long enough to enjoy it.
Fantastic video. What was the 'capital value' risk of drawdowns 8m29s, I didnt fully understand what was meant by that even though Ed was using his amazing sharpies!
Excellent video that simply explains the differences between annuity and drawdown. The big unknown that makes one more riskier than the other is how long we will live. If you die shorty after taking your annuity then the insurers receive a windfall benefit from all of your years of hard work and saving. On the other hand if you opt for draw down and you live to a ripe old age then you run the risk of your pension pot running dry and leaving you with no income for your remaining years. Are there any regulations with regards to your spouse or children etc getting part of your annuity back if you die shortly after taking your pension or is it a case of once you die you loose all that you have paid? If you were in ill health with a high likelihood you will die early, then drawdown would be the best option as you are unlikely to spend all of your pension savings and you will have something to leave to your loved ones. Are you able to comment on the above? Thank you…
Hi, really like your videos, great advise and easy to follow, a few things that aren't discussed in a lot of scenarios though are how long realistically you need your money to last and it would be good if you could show some examples in another video around real world life expectancy, from ONS web site: Life expectancy at birth in the UK in 2018 to 2020 was 79.0 years for males and 82.9 years for females; Life expectancy at age 65 years was 18.5 years for males and 21.0 years for females; these estimates are very similar to those for 2015 to 2017 So for the average retiree at 65 their money only realistically 'has' to last for up to 21 years. I guess this is why the emphasis needs to be on making plans to retire as early as people can afford. It also means some key considerations for annuity planning, eg if the payback, albeit being index linked, is more than 21 years then for most people it's not a great option.
Hi Edmund really good description, maybe real scenarios may also help, like comparing annuity with the worst growth experienced in the last 10, 20 30 years etc. Also any alternatives available worth considering, property ?? Any other differences i.e. funding for potential care and the impact that may have.
Nicely explained video. I suspect many who are taking too high a percentage of withdrawal could have serious problems if and when a severe stock market crash takes place. I'm surprised how people who wouldn't consider themselves 'gamblers' - are prepared to take a real 'risk' with drawdown.....
Indexed linked curve should have gone upwards to (I assume) a value at, or higher than, the non indexed linked curve? I would personally chose the non indexed linked product - after all, if you want, you can always re-invest the difference.
Hi again, I’m 51, hoping to retire @ 60, I’m im my workplace pension, I contribute £1000 a month to be set aside & my company contribution is 10%, my workplace pension which is taken directly from my wages @ the end of each month, my workplace pension is with Standard life & Ive seen my pension plummet by £10,000 over past few months due to war in Ukraine or that’s roughly when it started to drop drastically, I’m sure that due to many workplace pensions are adjusted & linked to stock markets which are very unsteady @ present, is it just a storm we will have to sit out or do you think that it’s best to seek advice from a financial perspective as to see whether my money can perform better elsewhere? Regards Gary, a keen subscriber & follower of your channel⭐️
The basic rules with insurance statistics are quite simple: When you are young say age 20 your chances of dying before say age 80 are quite high, so they sell life insurance to make huge profits. When you are older say age 60 your chances of living until say age 80 are much better than when you were age 20, so they sell annuities to make huge profits. I summarise this as 'Insurance companies would have you think that at age 20 you could die next week, at age 60 you should consider yourself immortal.' Interestingly my Grandmother aged 45 was persuaded to take out insurance cover on my Grandfather aged 50, when he died within a month the insurance company didn't want to pay out. The latest insurance industry policies would now only return the premium paid.. Always divide 100 by the interest rate offered on an annuity and add the result to your current age. Chances are you'll have to outlive any previous recorded oldest member of your family in order to just get your money back. If you think you're going to set a new family record for longevity buy the annuity. Unless of course you'd have to beat a World record to get your money back, which is entirely likely. Insurance companies main aim is to make profit for their shareholders and to pay mega bucks executive salaries. They're far removed from the benevolent societies that they grew out of.
Edmund - great videos. Thank you for setting things out so clearly. I have a question as to when the tax free amount is calculated. If your pension pot is £1m when you retire at 60, the tax free element would be £250k. If you decided not to draw from the pot until aged 65, lets assume the pot might then be worth £1.1m. At this point the tax free element would be £275k. Is the tax free amount calculated at retirement age, or when you first make a withdrawal from the fund?
I am 51 and will be retiring very soon through Ill health, this is not terminal as in 1 year life expectancy, more likely to happen in the next 5 to 10 years. I am currently looking at pension drawdown through all my pensions, I have decided not to touch my super annuated one through my work place as it doesn't hold very much about 8 years. My 3 private pensions collectively have a significant amount in them. I am thinking of claiming my 25% drawdown on the three pensions, 1 to clear debt, a trust deed thanks to an ex partner. 2 to enable me to achieve bucket list while I am able, and lastly to gift a small amount to a family member. I have to be careful of savings and not exceed £6000. Would I be able to gift a sum of money to the family member from the insurance company, or does it have to go into my bank account? And does paying of a trust deed get taking into account when taking a drawdown?
I'm interested in the current climate as to what level of growth on investments should one use to plan. Historically advisers used 7% and regularly achieved higher. Is that still the case or should the sights be set lower at say 5%. Or should it be more bullish and assume that any losses today will be regained significantly once the world gets "back to normal" again.
Thanks for the comment Tony. Vanguard has revised down its expected return from equities especially from US large caps and also the volatility of its flagship life strategy range as increased significantly, but certainly yes there expected long term returns from equities is lower. I’ll see if I can link the research.
I plan to tax my pcls from my DB and in stages, my tax free amount from my DC, and put them into stocks and shares ISAs. I will then drawdown tax free money from ISAs, and leave the taxable amount to grow in equity, as an inheritance. Minimising tax paid. How does that sound?
Useful video Edmund.. I have been thinking about the tax implications of pensions and ISAs. I am retiring before long and plan to move to Australia. I know that if I am in Australia for tax purposes I have to follow Australian tax law (and there is a 'no double taxation' treaty) but this implies that Australia wouldn't recognise the 25% tax free element. so I assume it may be better for me to take all of the tax free element when resident in the UK? I would then have to pay capital gains tax on subsequent growth of that investment in either country but better than losing it altogether? Same challenge with ISAs (in that the tax free wrapper wouldnt be recognised?)
Edmund great video and the “scribbles” are worthwhile in my opinion. Could you clarify something for me, I know the 25% from draw down is tax free as you state but I thought the remaining 75% was taxable come what may however I think you say that if you continue to draw that 75% and manage to keep it below your personal allowance then that to would be tax free, is that correct? Many thanks
Thanks Scott! Yes the remaining 75% once the tax free cash is all used up is taxable income. However, if your taxable income falls into your personal allowance of £12,570 then no tax is payable. However if you have other taxable income then anything over that personal allowance is taxed. Hopefully that makes sense.
@@EdmundBaileyUK When you receive your state pension that only leaves a small tax allowance. difference between £12,570 minus £9,379 approx dependent upon your N.I history and other taxable income sources. Assuming no other taxable income and £3191 tax allowance. and the same sum drawn from a pension. would the provider tax 75% of that sum and would you have to claim back £600 approx from HMRC. Enjoyed the presentation.
Thanks so much Peter. The pension provider on starting drawdown would request a tax code from HMRC, then tax code would tell the pension provider that some of the personal allowance has been used and therefore will tax the pension income according to the tax code received from HMRC. Typically the first pension income payment from the pension will be inaccurate based on full basic being applied with no personal allowance. The future income payments would then be adjusted to account for the overpayment. Hope that makes sense.
Drawdown is the best alternative because you do not relinquish control of your money. If you die, say 10 years after buying your annuity - poof it's gone.
Thanks, there are now options that allow you to protect the capital used to purchase the annuity through the use of guarantees to avoid exactly the position you describe.
