Drawdown versus Annuities
Should I take drawdown or buy an annuity?
After you have taken your 25% tax-free cash, two common choices for accessing the remainder of your pension are drawdown and annuities. Both options offer their own advantages and drawbacks, which is why many savers find it difficult to make a definitive choice.
How does Drawdown compare to Annuities?
| Drawdown | Annuities | |
|---|---|---|
| Flexibility and control | You have complete control to access as much of your money as often as you like. You can also choose your own investments or leave it to your adviser, who has the expertise in this area. He/she will conduct regular reviews of your fund or portfolio and switch according to market conditions or if your attitude to risk should change. | Some annuities will let you choose your frequency of payment, but you have no other control over your income and once you’ve purchased an annuity you cannot change your mind (although this is expected to change from April 2016). However, there are no investments to review or manage and no need to make any changes. |
| Security | There is no guaranteed level of income, the investments within your flexi-access drawdown remain invested and can go down as well as up in value. | Your income will usually last for at least the remainder of your life, regardless of how long you live and how the markets perform. However, you may not be protected against the effects of inflation. |
| Your choice | We will source the best flexi-access drawdown that matches your requirements. | Every provider offers different rates on the different types of annuity, so it pays to shop around before making a decision. |
| Value for money | Most flexi-access drawdown’s will charge you annual fees or additional fund charges, although your returns could be higher with drawdown than an annuity. | You make a one-off purchase for a guaranteed income that usually lasts until you die. This could prove to be good or bad value for money depending on how long you live. |
| What happens when I die? | Your pension can be passed on to beneficiaries as a lump sum or an income (taken through drawdown or an annuity). The money could be subject to tax, depending on your age at death. | Usually there are no more payments, unless you purchase a joint life or guaranteed period annuity in which case a pre-agreed level of income will be paid afterwards. |
| Health and lifestyle benefits | Your health and lifestyle will not affect your level of income. | If you smoke cigarettes, have a health condition or take prescribed medicine you could get a higher level of income by purchasing an enhanced annuity. |
A combination of both
Like many people, you could benefit from using both an annuity and drawdown to provide your retirement income. For example, you could use part of your pension fund to purchase an annuity for your essential living expenses, with the remainder of the fund accessible through drawdown as and when you need to. This can be a complex area, so if you are unsure about your best option at retirement then please let us advice you as to your best option.