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Income Drawdown: Better Than An Annuity?

The two most popular options for converting a pension into an income are without doubt an Annuity and Income Drawdown, but which is best?

First things first, how do they work?
We could write a whole article on each option explaining how they work, but it’s worth briefly outlining the basics of each option.
An Annuity is bought with your pension fund, it provides you with a guaranteed income for the rest of your life and that of your partner, if you choose to include a spouse’s pension. It is also possible to build in protection against inflation and a guarantee that if you die sooner than expected the income will continue for at least five or 10 years.

An Income Drawdown plan is very different. Your pension fund remains invested, in accordance with your wishes and your attitude to risk and each year you draw down an income, up to the maximum available. The income is not guaranteed; if investment performance doesn’t make up the income you take (plus charges) you could see your income fall in years to come.

Retirement Income Annuity

So which is the right option for you?
As always when it comes to personal finance there are no easy answers, but here are some basic rules of thumb:

An Annuity might be right for you, if:
• You want a guaranteed income for the rest of your life
• You want a relatively simple solution to your income needs
• You are happy with current Annuity rates
• You want to take no risk with your pension
• You are happy with your spouse only being able to have an income from the pension on your death with no lump sum option
• If you suffer from ill health which might increase your level of income because you qualify for an Enhanced Annuity
• You are happy to give up control of your pension
• If you are happy with a fixed level of income, which can never be changed, except for annual increases, if you have selected this option at outset

Income Drawdown might be right for you, if:
• You are happy to take some risk with your pension fund
• You understand the importance of reviewing your Income Drawdown plan each year
• You are happy that your income might fluctuate and even drop if investment performance is not good enough to sustain the withdrawals that you are making
• If you want flexibility to alter the level of income which you are taking
• If you want your dependents to have more flexible options on your death, including being able to take a lump sum

Don’t forget other options
An Annuity and Income Drawdown are just two options available at retirement; there are many others to choose from including an Investment Linked Annuity, Fixed Term Annuity and of course Flexible Drawdown, providing that is you qualify.

Even if you plan to take advice, as you approach retirement we’d suggest you spend some time reading up on the various options, look into the pros and cons of each in more detail and think about which option would fit your requirements best. A successful retirement isn’t just about getting the best Annuity rate, you need to make sure an Annuity is the right option in the first place!

1 comment:

  1. I'll go for annuity. I want to play safe. I don't want to risk my guarantee income. I know returns will be fixed as I'm not taking any risk.

    ReplyDelete