Thanks to pension freedoms, there is now more flexibility than ever over how you are going to take your pension. Pension drawdown has become particularly popular in recent years, but there are still advantages to the more traditional pension annuity.
Income drawdown is the newest option. Your defined contribution pension acts like any other investment as you pay into your private pension and – hopefully – see your investment grow. When you retire, you can withdraw money as and when you need it. The rest of it stays invested in your pension pot to potentially keep growing. A pension annuity, however, allows you to guarantee a regular income for the rest of your life or for a set period of time. The income is always there, and in most cases, you cannot change or cancel if you change your mind.
Both options have their advantages and disadvantages. An annuity offers guaranteed income and peace of mind – but once you have made the commitment it’s usually impossible to change. Pension drawdown gives you flexibility but needs to be managed very carefully so your personal pension does not run out during retirement.
Purchasing an annuity maybe a good option for people looking for financial security and to understand what retirement income they will receive monthly. Furthermore, in times of financial insecurity and a volatile stock market, moving your investments into an annuity may reduce the financial risk and potential losses compared with income drawdown. Learn more about our Advised Annuity service.
Both options require a lot of thought. For an annuity, different providers offer different options, and you will need to shop around for the best deal on the open market. Other annuity options involve how your loved ones will be looked after – for example, you may be able to have payments directed to your spouse after you die. For pension drawdown, independent advice is even more important: you need to consider how to manage your money, how to keep track where your pension funds are invested, and what the best plan to withdraw your money will be. Remember, this is an investment like any other – our guide to investing for income in retirement gives more details. For all private pensions, you need to check what fees are charged by the pension scheme and pension provider to make sure you are not losing money.
Assuming you do not have a single defined benefit scheme, the answer is yes (and even if you have no option apart from the guaranteed income, remember you may still be able to withdraw the lump sum and potentially reinvest it). You can set aside part of your pension for different purposes. Whether or not you withdraw the tax-free lump sum, you can invest part of your pension pot to withdraw when you need it. You can then use the rest to buy an annuity, giving you a guaranteed income alongside your state pension should you qualify for that.
A financial advice company like Pension Works, regulated by the Financial Conduct Authority (FCA), are the best people to help you choose what options are best for you. Looking at your financial situation, they can compare different providers, and give impartial pension advice on retirement planning and what are your best options. They can also explain the different annuity rates and income drawdown deals on offer and help you to negotiate any fees and process the paperwork.
To get free, impartial advice on income drawdown or advised annuities, contact us today on 0808 164 2664. Or, to find out more about Pension Works, click here.
This can be found on your payslip, P60 document or letters about tax, pensions or social benefits.
If you have (or have had) a pension that is described below then we can potentially carry-out a Pension HealthCheck.
Defined Contribution Pensions
These are ‘Pot of Money’ pensions where the benefits provided take into account the value of the fund at retirement. They can be personal pensions or Occupational Pensions. There are no guarantees as to what pension will be provided. This will be a reflection of contributions made and investment growth.
Defined Benefit Pensions
These offer the promise of a guaranteed pension at retirement which reflects the length of service with an employer. It will be based on either the Final Salary or Average Career Salary of the employee. Providing the company is still in existence, there is no investment risk for the pension receiver. This type of pension is becoming less frequent.
This is a generic term for pensions that are not workplace schemes.
Group Personal Pensions
Employer-sponsored schemes – each member has a personal pension plan, and their contract is with the pension provider. The employer’s role solely is to select the scheme provider, decide if there should be any restrictions on fund choices and take contributions from the employee’s pay and forward them with employer contributions to the pension provider.
A private pension arrangement or personal pension is taken out by a sole-trader or self-employed worker.
State Earnings Related Pension (formerly Graduated Pension and subsequently State 2nd Pension or S2P) was an additional element of State Pension for employees. The amount of pension was linked to the employee’s salary. SERPS was abolished in 2016 when the flat rate State Pension was introduced.
Private pensions are contracts between the pension member and an insurance company or another pension provider.
These are personal pensions where the member has a much wider choice of investments, including commercial property and single company shares.
Personal Pensions with a set of rules that impose amongst other things a maximum annual management charge (AMC), low minimum contribution levels (£20 per month) and an appropriate Default fund.
Private pension linked to an employer’s Defined Benefit Scheme but separate from the Scheme’s internal Additional Voluntary Contribution (AVC) arrangement – largely defunct since the rules were eased several years ago, allowing people to contribute to both personal and employment schemes as they wish.
Money Purchase Pensions
This is another name for Defined Contribution Pensions.
Unfortunately, we are unable to help clients who currently work for or have a pension from one of the following:
If you are unsure about the type of pension(s) you hold, please contact us on 0800 756 1288 or email email@example.com