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.
What are the differences between drawdown and 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.
When might an annuity be better?
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.
What should I check?
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.
Can I do both?
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.