Drawdown vs Annuities Friday 20 Nov 2015

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 andannuities. Both options offer their own advantages and drawbacks, which is why many savers find it difficult to make a definitive choice. In fact, many people find that their best option is to use a combination of both. However, this will depend upon your individual circumstances and you may benefit from consulting a financial planner before making a decision.

 

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, but this could mean additional time and effort unless you choose a managed solution.

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 SIPP 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

With the Best SIPP you can choose from 2,500 funds plus hundreds of trusts, ETFs and UK shares.

Every provider offers different rates on the different types of annuity, so it pays to shop around before making a decision. You can use our online annuity service to compare live rates and make a purchase.

Value for money

Most SIPPs and funds will charge you annual fees, 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.

 

Important Information

The decision to access your pension is an important one and will affect your income and possibly your standard of living for years to come. Therefore we recommend that before any decision is made you receive regulated financial advice or get free guidance from Pension Wise. Find out more about Pension Wise.

*The lump sum/income will be taxed at the beneficiary’s usual rate. Transitional arrangements exist for the 2015/16 tax year.

Published on the Bestinvest website November 2015 

www.bestinvest.co.uk/your-options-at-retirement/drawdown-vs-annuities