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Annuity vs Drawdown

“I wish to retire next year, so I have started looking into the available options and how much income I am likely to have. I have a pension worth around £400,000, and I need some advice on whether I should take money from my pension as and when I need it or whether I should use it as regular income?”

Carl Responds:

Previously, retiring meant that you would use your whole pension pot to purchase an annuity, which would provide you with an income for the rest of your life. In 2015, the Pension Freedom rules were introduced, which means that you can now withdraw money from the pension when you need it – this is known as drawdown.

When considering your pension options, you will need to think about how much income you will receive from your pension or how much you can drawdown. An annuity can provide financial certainty and security, and you will often have the option to protect your partner on death by purchasing a joint annuity. As a result, your partner would carry on receiving a proportion of the payments after your death.

While an annuity can provide you with financial certainty, it is less flexible than a pension drawdown. You can’t change the shape of your income or switch providers once you have purchased an annuity. Unlike drawdown, there is no investment value and, therefore, you will not have a pension pot to benefit from growth. Furthermore, as there is no pension pot, there is no value to pass onto your family members or other beneficiaries. You could provide lump-sum death benefits in a different way, such as a separate life assurance policy.

Pension drawdown allows you to draw an income from your pension while the balance remains invested. As with any investment, there is a risk that the value could go down as well as up. A perk of choosing drawdown is that you can vary your income over time to suit your circumstances and there is potential for your pension pot to grow more after you reach retirement age. A disadvantage of drawdown is that there are no guarantees – it is your responsibility to ensure your pension pot lasts for the rest of your life.

There are other options available, such as direct withdrawals without entering a drawdown contract, and it is possible to have a mixture of more than one type of arrangement. Before deciding what to do with your pension, it is important that you understand the available options.

I would recommend speaking to an Independent Financial Adviser so that you can work together to create a financial plan. Together, you can work out your long-term goals while ensuring your finances remain on track to achieve those goals.

Any opinions expressed in this article do not constitute advice.  The value of an investment and the income from it could go down as well as up.  The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.