I AM 64 and have £75,000 in a private pension. I want to start drawing an income. I like the idea of a drawdown plan instead of buying an annuity because I'm worried about inflation.
Can you offer any advice?
AHTom McPhail, head of pensions at Hargreaves Lansdown, writes:YOU are right to be concerned about inflation. The Government's official inflation measure (CPI) has already breached its targ
et; the more widely relevant RPI measure is now running at more than 4% a year, and some manufacturing measures are showing inflation running at much higher levels. The capital markets are now showing higher inflation expectations than at any time since 1997.
You could simply buy an RPI-linked annuity. However, the income available from an inflation-linked annuity is now pretty low; as a rough measure typically you would have to live until nearly 90 for an RPI-linked annuity to be worth more to you than a level annuity. One compromise option is to buy an annuity that rises by a flat 3% a year. For technical reasons these haven't come under the same pricing pressures that RPI-linked annuities have, and so may represent a better deal.
You could go for a drawdown. However, your fund size is very much at the bottom end of suitability, and an IFA would generally advise against it. This might be different if you have a substantial existing pension elsewhere, such as a final salary scheme.
The benefit of a drawdown plan is that it enables you to invest in company shares. Hopefully these investments in shares – in economic activity – will produce a rising income over time.
An alternative would be to look at a compromise solution such as a with-profits annuity (for example Prudential), or a unit-linked annuity (for example Scottish Widows), or an insured retirement plan (for example Aegon's Income for Life).
This last option involves investing in the stock market but paying for a guarantee that your income won't go down. It's clever, but quite expensive in terms of charges and possible lost investment growth.
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