That sounds good in theory but it is not really an option for the majority of people. The reason is that it only works if you have a considerably big pension pot available on the day you retire. These days if you have £35,000 pot you are in the top bracket. That only gets you £1,400 in annual income if you put it in "high income fund" (at 4% dividend yield).
Can you really afford to live off the state pension + £1,400 AND leave 35k to your kids at the same time? I really doubt that.
You would probably need at least 300k pot to live off the income on its own getting 12k dividend income annually. And 300k pot is unrealistic for 95% of the people.
The point I am trying to make here is that not many people are able to leave cash to their kids these day unless you are they are prepared to considerably lower their standards of living OR they are rich already. And that's today, in 30 years time you'll be lucky to get anyting from the state. So even today you will have to use your 35k pot (the principle) to subsidize your income. That will of course decrease you future dividend income. Essentially you will have to estimate how long you are going to live AND you will have to get that right.
Annuity is essentially an insurance that you will not run out of income before you die. Essentially you transferring two risks to annuity underwriter:
1. Market risk - risk that your assets (investment in high income fund in your case) will lose their value and that you will get bellow expectation income
2. Longevity risk - risk that you will much longer than you expect
Every insurance that you buy costs money (premium you pay). In general you should only insure assets that you cannot afford to lose (e.g. you are not able to replace them easily once they are gone or damaged). That's why you don't insure your mobile phone because if you lose it you can easily buy a new one. However you probably have you house insured because if it burns down you won't be able to replace it.
I can't imagine any asset in a life of person that is more precious and more irreplaceable than their pension pot. You have worked all your life to accumulate it and when you get old you won't be able to replace it if you lose it or it loses its value.
We all have different preference to risk and we are willing to pay different amounts to take on or offload the risk, I understand that. But what worries me is that most people underestimate the market risk.
FTSE100 fell by 50% from its peak during the last crisis. Can an average person (with their 30k pension pot) afford to lose 50% of their investment value when they are retired (even if that is temporarily, e.g for 5 years)? Can you afford to lose 50% of your income from your "High Income fund" for that period of time?
I really doubt you can. Not to mention the stress that it would bring you...
.
