Annuity or pension drawdown?

Annuity or pension drawdown?

When the time finally comes to withdraw your pension, there are a few options available to you, the most common of which being annuity and drawdown.

Both have unique benefits and setbacks, so it’s worth familiarising yourself with the details to make the perfect choice for your needs.

What is an annuity?

An annuity is a type of insurance product that essentially guarantees you an income for the rest of your life. You can purchase an annuity from a provider (this does not have to be your pension provider) by exchanging your pension pot for a regular income.

You can swap some or all of your pension pot for an annuity, and the resulting income you receive will never run out, meaning that it provides a consistent return regardless of the money in your pot.

When is an annuity a good idea?

Perhaps one of the main advantages of an annuity is that it provides a fixed income, and it is unaffected by changes in the stock market or the turbulence of the economic landscape.

On top of this, an annuity never runs out, and it needs no managing whatsoever. If you can afford the premium (which can be a great deal of money to pay upfront, depending on the provider and the type of annuity you buy), purchasing an annuity is a superb way to give yourself peace of mind and financial security in retirement.

If you plan on retiring early, or you suspect you’ll live a long life after you finish working, an annuity is certainly worth considering, as it guarantees an income, and it often comes with death benefits, like beneficiary payments following the end of your life. These payments can be substantial too – it’s usually the same amount of money you bought the annuity for in the first place.

It’s important to note that annuities can be incredibly complex products, so before you commit to buying one, seeking financial advice from an expert professional is likely always in your best interests.

What is drawdown?

Another popular method of withdrawing a pension is known as drawdown. This involves withdrawing lump sums from your pension as and when you need the money, leaving the remaining money in the pension pot free to grow over time as it stays invested.

Your withdrawals will be taxed as non-savings income, which can play into your favour if you choose to use drawdown in a way that minimises the amount that you’ll have to pay over time. For example, you could take smaller sums out if you wished to pay less tax, leaving the rest of your savings invested in an effort to grow your savings.

When is drawdown a good idea?

Drawdown is a superb option for those who can manage money well and wish to have more control over their savings.

The flexibility this option offers is preferred by many over the fixed income offering of an annuity. However, it is much riskier, but pensions are low risk anyway, as your savings could decrease or fail to perform as you imagined they would when you leave them invested.

You can use drawdown to take varying amounts of money rather than stick with a fixed rate of income, so if you think your spending needs are subject to regular change and an annuity income won’t cover these changes, it is worth exploring this idea.

Can you do both?

It is entirely possible to benefit from both an annuity and pension drawdown. In many instances, it’s one of the best ways to find the balance between security and flexibility.

You can use the drawdown method to purchase an annuity if you wish, which might give you the best of both worlds.

Ultimately, the right decision depends on how much money you have to work with in your pension pot, when you plan on retiring, whether or not you want to manage your money closely, and how much money you think you’ll need to support your lifestyle.




The content of this article is for general information purposes only and should not be construed as legal, financial or taxation advice. You should not rely on the information contained in this article as legal, financial or taxation advice. The content of this article is based on information currently available to us, and the current laws in force in the UK. The content does not take account of individual circumstances and may not reflect recent changes in the law since the date it was created. It is essential that detailed financial and tax advice should be sought in both jurisdictions and any legal advice, if required.

This notice cannot disclose all the risks associated with the products we make available to you. When making your own investment decisions it is important you understand that all investments can fall as well as rise in value and it is possible you may get back less than what you have paid in. You should also be satisfied that any investments you choose are suitable for you in the light of your circumstances and financial position. You should seek financial advice if you are not sure of what’s best for your situation.


Apply now


Subscribe to our newsletter