As part of our series of blogs about pensions and retirement, Acumen helps to equip you with all the information you need to maximise your pension forecast. In this blog, we explore the pros and cons of annuities and pension income drawdown.
The decision whether to buy an annuity or to take pension income withdrawals deserves careful thought. It is worth taking some time to consider the choices; some people are likely to be better off buying an annuity and others should draw their income directly from their pension fund. In some cases, it may be worth starting with pension fund withdrawals and buying an annuity some years later.As a general rule, the higher the initial income you receive from an
As a general rule, the higher the initial income you receive from an investment, the less scope there is for future income and capital growth. Higher income may also mean paying more tax.
How is an annuity different from pension drawdown?
An annuity is simply a lifetime income that you can buy with your accumulated pension fund from an insurance company. There are two key choices you have to make if you buy an annuity; the form of annuity and the annuity provider.
Your annuity income could stay at the same level for the rest of your life or you could opt for a lower starting income that increases each year to protect you against the effects of inflation. You could also choose for income to be paid to your spouse or partner, perhaps at a lower level than your pension.
Don’t automatically buy the annuity offered by your current pension provider – the chances are that you could do better. There are substantial differences in annuity rates offered by the top and bottom companies and they change frequently. You may also qualify for an enhanced annuity because of your health or other circumstances.
Remember, this is a decision for life. There is no substitute for skilled advice from an expert who can check the whole market for you. The advantage of an annuity is that it is simple and guaranteed to last for the rest of your life – and your spouse or partner’s life as well if you buy a joint annuity. The main drawback of an annuity arrangement is that it is not flexible.
Pension income drawdown
Under pension income drawdown, you draw your income directly from your pension fund. This is much more flexible, but there are no guarantees that the fund will be able to pay out an income for the rest of your life. In general, the death benefits tend to be better than those provided by annuities. Pension drawdown is generally more complicated and costly to administer than annuities, and carries additional risks, so it is not suitable for everyone.
There is very considerable flexibility about how much you can draw from your pension fund once you have decided to take drawdown, including not drawing any of your fund but leaving it in the more or less tax free environment to accumulate. Since April 2015, the Government has introduced complete flexibility, including the ability to take the whole fund in a single payment.
Whatever you do, you should consider the tax consequences. Drawing down a very substantial amount from your fund could cause more of your income to be subject to higher rates of tax than if you drew smaller amounts each year. Or you might be able to plan your income so that you can take a substantial amount from your pension without an especially high tax charge.
There are variants of income drawdown that can provide some extra security. Variable annuities guarantee a minimum income level – at a cost. While fixed term annuities allow you to secure income for a number of years and leave a pot of money at the end for future income.
You should review your investments with your adviser regularly – usually once a year – to make sure your objectives are still being met and that your pension forecast matches your expectations.
To discuss your pension plans with one of our dedicated team please contact us today on 0151 520 4353 or email firstname.lastname@example.org.