Brian Henderson’s wonderful decumulation VFM chart!
This man is asking the right questions and though my answer to DC starts with a “C”, I know that value for most people’s existing money will come from the decumulation of the DC pot. Most people who are read this that is. But most people aren’t so smart as you.
The document is too small for the linked in post so here it is for you to ponder. You can draw it down as a PDF to share with colleagues! Use this link.
The CDC is retirement CDC, not the whole of life version.
What does it tell us?
It tells us that for flexibility, drawdown throughout has advantages over annuities and CDC. If you define value for money as the amount coming back to you in anything but the longest term. If you assume you or your adviser are competent and ready to do the work.
But if you want a “wage for life” solution, CDC beats any other solution hands down. Most importantly you get the income without any work and no skill’s required to have the money in your bank each month. It’s best VFM in terms of “money back” if you live for 30 years “retired”.
The guaranteed annuity is not value for money whether you buy it at outset, mix it with drawdown from year 10 as part of your drawdown (50% illustrated here) or swap your drawdown for annuity in later life (flex and fix). In terms of VFM, the annuity is a loser and investment solutions are winners. Annuities will only be used if there’s no other alternative and you are averse to any kind of risk.
If I was Brian (and I’m not) , I’d chance my arm and go for pure drawdown. On a VFM basis the value that a really sharp investment guru can get by watching over the portfolio may make the lower income worthwhile. I probably have money enough and a flexible retirement plan not to need everything simplified to a “wage for life!”
But if I want (and I do) an income from what I’ve saved (my pot) then I will swap the mystery of a drawdown for the relative certainty of a collective pension (CDC). Whether I’m betting on long life as something to be insured against or something I’ll want money to enjoy, CDC is for me. If I want to keep my options only and miss out if I make it to my 90s, then drawdown works so long as I do too! You have to work well though!
What I was surprised from this analysis was how little value for my money comes from buying an annuity at any time.
Mr Henderson’s framework is interesting; your own enthusiasm, Henry, is understandable; but “investments beat annuities or even CDC” is not a conclusion about retirement products in general with which I’d necessarily agree.
It’s a conclusion that under particular assumptions about a retiree’s objectives, his/her investment competence, risk tolerances and time horizons, yes, retaining the “pot” and drawing from investments can have higher financial value. Particularly if they have other savings, other resources to fall back on if need be.
That’s much less wonderful, maybe even tedious on my part to mention.