If you’ve read part 1 (and you can do so here) you’ll have seen how a drawdown scheme can potentially be a more lucrative option than an annuity, given certain conditions. But things are never quite that simple, and we haven’t yet answered the second question I raised, which is:
What level of investment risk would you accept in exchange for the potential for more income?
This part is ‘the small print’. We saw in part 1 that a drawdown plan only needs to make an investment return of 2 per cent a year (plus charges) in order to beat an annuity very easily. Or did we?
Think again! That 2 per cent a year investment growth may seem like a very low level of return, but it’s not as easy as this. The spanner in the works here is known as the ‘sequence of returns risk’.