Since pension freedoms, a pension annuity has experienced something of a drop in popularity. Income drawdown has become increasingly popular, and many people have taken to the idea of being able to access money when they need it. However, it’s worth giving pension annuities a second thought – it might be the best option for you.
What is a pension annuity?
A pension annuity offers you a guaranteed income for a set period, which could be for the rest of your life. An annuity used to be the default option and still favoured by some company pensions, called Defined Benefit Pensions. You can purchase an annuity with a percentage or all your pension pot, and you receive a regular guaranteed sum.
What are the benefits?
A significant benefit is the peace of mind. An annuity is a guarantee: there is no chance of your money running out before the end of the agreement. Pension Drawdown can be affected by fluctuations in the stock market – this is because your pension pot remains invested. An annuity, on the other hand, offers more security. It could be a particularly good option given the financial uncertainty due to Brexit. If you are in poor health, you could be eligible for an enhanced or ‘impaired life’ annuity, which gives a higher income.
Added to this, there is much less to do in terms of financial planning. You will not need to continually monitor your pension pot, or keep having to make decisions about what to withdraw and when. If your current job gives you a steady wage month by month, an annuity will provide you with the same stability.
It is worth shopping around the open annuity market, as your current pension provider may not offer you the best annuity deal.
Are there any drawbacks?
An annuity is not flexible. This means that, if you need more cash at some point, you cannot just withdraw a larger sum. You also do not have control over your pension pot, so you cannot make changes or keep money invested, helping it grow.
What can I do?
Why not have the best of both worlds? It’s possible to enjoy the advantages of an annuity – and avoid many of the drawbacks.
Firstly, you can enjoy flexibility through a little saving and financial planning. Your pension income is yours to do with as you wish, you’ve saved it. If you don’t spend all of your income, you could save and invest. You can continue to put aside any surplus each month, just like you probably do now.
Alternatively, why not consider a pension hybrid? This is a pension option where you spend part of your pension pot on purchasing an annuity. This provides the guaranteed income and all other advantages but leaves the rest of your pension fund invested. It’s then yours to do with as you please – you can withdraw when necessary, or keep it invested.
Remember, your pension pot is your money. If your current private pension does not offer an annuity option, then pension transfer might be a good idea. With the help of a pension adviser, your pension fund can be transferred to a pension provider that offers the options that work best for you. See our Guide to Pension Transfers for more information.
Retirement planning is a big decision, and if you choose an annuity or pension hybrid, it is essential that you seek pension advice to help you select the best combination for your needs.