Pension Drawdown Vs Annuity

When considering the difference between a drawdown or annuity pension, it’s important to have a clear understanding of the benefits of each option so you can make an informed choice that suits your own personal preference.

Fortunately, the advisors we work with are experts when it comes to pensions and can give you the right advice on which is best for your circumstances.

To assist you in this decision we have produced this guide to help you with your income drawdown or annuity purchase covering the following areas:

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Which pension plans allow me to use income drawdown or an annuity?

Personal (or private) pension plans are usually defined contribution schemes, therefore, if you have one of these plans you will have a choice between either purchasing an annuity or an income drawdown plan when you reach 55 years of age.

The other main type of pension is called a defined benefit or final salary pension. These schemes are based on the number of years service and will pay you a pension (based on a percentage of your final salary) once you reach a predetermined retirement age.

Final salary pension schemes do not allow you to purchase an annuity or use drawdown at retirement. The only way you could do this would be if you transferred your defined benefit fund to a defined contribution scheme.

This is usually not recommended as you would lose out on a number of ancillary benefits which typically outweigh what you could receive from a personal pension plan. That said, there are circumstances in which it might be viable, such as contracting a life-limiting illness or running into financial difficulties.


What is the difference between an annuity and income drawdown?

When giving consideration to whether you should choose an annuity or income drawdown with your retirement fund, it’s important to understand the key differences between the two options.

Length of time to receive an income?

This is probably the main difference between the two options. An annuity can provide you with a guaranteed income either for the rest of your life (Lifetime Annuity) or fixed for a set number of years (Fixed Term Annuity).

Income drawdown will only provide an income for as long as there are funds still remaining in your pension pot. Once all of the funds have been used your income will stop.

Dictating how much pension you receive

Income drawdown gives you complete control over when you want to receive pension payments whereas an annuity will make regular payments as agreed at the outset (either for life or for a fixed term).

There are also tax potential tax benefits to consider. For instance, with drawdown you can vary the amount you take which can give you control over how much tax you pay.

Family inheritance capabilities

If you die with funds still remaining in your pension pot with income drawdown your family will inherit this money. If you purchase an annuity which is guaranteed for life then the income will cease at the point when you die unless you have a joint-life annuity where the surviving member will still receive an income.

Retaining control of your fund

When you take income drawdown withdrawals the remaining funds can still benefit from investment growth. With an annuity you effectively hand over control of your fund to your provider in exchange for an income for life or a fixed term.

If you’d like to know more about the key differences between a drawdown pension and an annuity make an enquiry and we can arrange for a specialist to get in touch.


Is a pension drawdown better than an annuity?

Many customers ask us is pension drawdown better than an annuity and there is neither a right or wrong answer to such a question – it really depends on whether a drawdown pension or annuity best suits your own personal preferences and circumstances.

Both options share common traits. You can take a 25% tax-free sum at outset from either an annuity or drawdown pension. The amount of income you receive is determined by the annuity or income drawdown rate tables used by your provider.

In order to reach a more informed conclusion let’s look at the main benefits of each:

Main benefits of an annuity

They are as follows…

Peace of mind

With either a Lifetime Annuity or a Fixed Term Annuity you have the peace of mind of knowing you will receive an income every month for the rest of your life or for a set period. This allows you to plan ahead and be able to budget accordingly knowing the money will never run out.

Different annuities available

Whilst a lifetime annuity is appealing for complete peace of mind, it is not the only option available to you. There are a few different variations, namely:

  • Fixed Term Annuity – offers a guaranteed income for a set period of time allowing you to avoid over-committing to a lifetime option
  • Enhanced Annuity – offers better annuity rates, therefore higher income, for those with particular health conditions
  • Escalating Annuity – offers the opportunity to increase your income in line with inflation

Main benefits of pension drawdown

Flexibility

A pension drawdown offers you complete control of how much and when you withdraw your money. This allows you to control your pension fund and adapt your retirement income to changes in your life.

You may not need as much income during the early stages of your retirement but more as you get older. Pension drawdown will be able to cater for this requirement.

Inheritance

With a pension drawdown fund you will always know that should you die whilst there are funds remaining in your pension pot these funds can be passed on to a beneficiary of your choice.

Investment

Whether you are taking drawdown payments or not your pension pot has the opportunity to continue to grow depending on how well the underlying assets perform. Your money can go down as well as up, however, the ability to control where your retirement fund is invested can prove attractive to a lot of people.


Do I have to choose or can I do both?

It’s possible to do both. For example, you may decide to use some of your pension fund to purchase a fixed term annuity in order to ensure you have a guaranteed income for a set number of years then use the remaining pension fund for income drawdown as and when required.


Speak to a pensions expert

The advisors we work with will not only work with you to make these initial decisions, but provide regular (usually annual) reviews of your pension investments to make sure they’re perfectly tailored to your needs and circumstances.

If you have questions and want to speak to an expert for the right advice, call us today on 0808 189 0463 or make an enquiry.

Then sit back and let us do all the hard work in finding the pensions advisor with the right expertise for your circumstances.  We don’t charge a fee and there’s absolutely no obligation.

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

We can arrange a free pension review for you today

70% of customers who have a pension review find a better deal

Author:
Tony has worked in a vastly diverse array of areas in the pensions industry for over 2 decades. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events. Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been "Hope for the best, but PLAN for the worst", and believes that the biggest impact that an adviser can have on a client's life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they WANT their retirement to be.

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