What to look for when choosing an annuity or drawdown solution

1 – Do your research and get advice

In order to decide which solution is best suited to your circumstances a good adviser will take you through a step by step advice process. This does not have to be complicated (or expensive) and the same thing happens when you make any important purchase or investment. This is not neccessarily called advice but decision making.

Good advice involves a two-way discussion between adviser and client. The more research you do, the better informed you will be and you will be able to make an intelligent contribution to the advice process

You can use our unique marketplace to research your options and the key issues.

2 – Make a plan and separate the strategy from the tactics

Good planning leads to better decisions. The plan does not have to be complicated and a rough plan is better than no plan at all. Separating the strategy from tactics means don’t just jump to the solution (however obvious it might seem) without first having a plan.

A good, but simple plan, will include setting out your income requirements including the amount of guaranteed income, working out your attitude to risk and deciding what should happen in the longer-term.

Finally, remember that retirement planning is more of a journey than an event. Put simply, it is not about making a one-off decison when you first retire but involves making a series of important decisions throughout the rest of your life

See my guide about the retirement journey and how to make a plan (coming soon)

3 - Consider the important options

Guaranteed income

Income for life

This is one of the most decisions you make. Guaranteed income may seem boring but if financial markets crash you will be glad your income is secure.

It is sometimes difficut to think about the future but will your pension income it is a must. If you don't consider the 'income for life' option you could run out of money in retirement.

Flexibility

Investment control

Everyone wants flexibility, but not everyone can take the risks that comes with flexibility

If you are considering an equity linked option such as drawdown, you must think carefully about your investment options. This involves accesssing your attitude to risk and capacity for loss.

 

Compare and contrast the options.

4 - Are you getting value for money?

It was Oscar Wilde who famously said “What is a cynic? A man who knows the price of everything and the value of nothing”

Costs are very important but it is not helpful to know the monetary price of a product or advice without not fully understanding the ‘non-monetary’ value, for instance peace of mind and security.

Generally speaking it makes sense to pay for the best advice but pay the least for the product solution. This is much better than skimping on advice and overpaying for the product solution (arguably this is what happens with no-advice services). Unfortunately, many people fall in the trap of not paying for advice only to find out they have paid more than the going rate for their annuity or drawdown.

With an annuity, the value for money is measured in terms of getting the highest possible income, and this is obtained by applying for an enhanced annuity or shopping around for the best annuity deal

With drawdown, value for money is harder to measure because there are three components: pan charges, investment charges and advice charges.

Plan charges do matter, because given the choice, most people would prefer to have a higher income than pay too much to their plan provider. The question of investment charges is more complicated because some people argue that higher investment charges are justified by the prospects of higher returns from actively manged funds. Other argue that low cost passive funds provide better returns.

Our marketplace allows you to compare the charges from all the main pension providers

One way of thinking about the cost of advice is it is insurance against making the wrong decisions. An adviser will not only try their very best to find you the right solution, they will also put things right if they are proven to have made a mistake.

5 - Double check that the solution will stand the test of time

When you are making a major decision it is only natural to go backwards and forwards between the different choices. We call this ‘windscreen wiping’ – one minute it is a guaranteed income option, the next it is a flexible option.

In fact I describe the advice process as being iterative. This means a good adviser will breakdown the decision making process in to a number of simple steps which can be revisited at any time. A good example of this is the investment risk step. It is not uncommon for someone to say that they want and are prepared to take risk but after learning more about the downside to taking risk, they may revisit this and decide they want to take less risk than they first thought.

You can always contact me for advice or for a second opinion