The Daily Telegraph recently printed an article outlining the drop in income from drawdown plans and how this had seen a radical drop in the number of plans being sold. Drawdown has suffered due to recent changes which have seen a drop in the maximum 120% of benchmark to 100% of benchmark as well as a drop in gilt rates.

At the same time the article seems to imply that people have moved across to purchasing annuities. The article then seems to lead you to the Telegraph Retirement Service which I assume will try and sell the unwitting reader an annuity!

The key to financial education is understanding your goals, and only then can you decide what are the best solutions to deliver those goals. I want to take this article but put behind it a case study.

A client comes to us and wants to receive £2,000 a month after tax in income. He is married and they have state pensions of say £800 per month after tax. So this means they need to find £1,200 p.m. from their investments.

So then we start to explore what they have:

  1. They have a small guaranteed pension of £200 per month
  2. They have a rental property which provides £600 per month
  3. They have investments outside an ISA of £100,000
  4. They have a pension fund of £100,000

We can already see that the guaranteed pension and rental income will give them around £640 per month after tax. So this would leave them £560 to find.

Now we have a few options. Let’s take the pension. Assuming the client didn’t need the tax free cash they could spread the tax free cash over nearly four years and take as tax free income of £560 per month.

They could take the income from the investments and utilise the CGT allowance. They could start to move some of the investments into an ISA and take the income tax-free.

The point is this. If the pension is the only source of income then the questions around whether an annuity or drawdown is right is a lot harder to consider but in many cases individuals facing retirement have a number of different investments where income can be taken from.

Annuity does provide a guaranteed income and for many this is important but people are living longer and flexibility is likely to be key to retirement planning so we need to be careful about not painting half a picture.

The full picture involves careful financial planning, and all assets can play an active part in providing retirement income if managed correctly. And with £700 billion moving into the post retirement space over the next ten years this is the picture we need to see.

NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.