Annuities & drawdown

Annuities work by taking your pension savings and paying out a guaranteed income for life, or over a fixed term. They are still right for some people, but committing to an annuity can mean less flexibility with your pension money. With drawdown, money left in your pension pot when you die can be passed to your family.

Annuities

When you come to retire, 25% of your total pension fund can usually be taken as a tax-free lump sum; the remainder can be used to buy an annuity.

An annuity is a type of insurance contract. Once purchased, the insurance company is responsible for providing you with a guaranteed income – any time from age 55 – which is payable for the rest of your life, unless it is a fixed term annuity.

There are several types of annuity and you are typically not obliged to purchase your annuity through your pension scheme provider.

Once it’s set up, an annuity is final and cannot be amended, so it’s vital that you think about your options carefully. You will need to consider both your immediate and long-term income needs as well as those of any spouse or partner.

An independent financial adviser can help you find the most appropriate product for you.

Drawdown

Flexi-access drawdown is the means by which – at age 55 or over – you can choose to draw your income directly from pension savings.

This approach offers you greater flexibility and choice over how you utilise your retirement fund. You can choose to take regular monthly or annual payments or take a series of lump-sum payments as and when you need them. This flexibility allows you to draw your income in line with your needs throughout retirement.

You can still access up to 25% as a tax-free lump sum. This can either be drawn in one go, or in phases. Once you exceed the tax-free cash allowance you will be taxed on any withdrawals at your highest marginal rate.

It is important to remember that if you choose the drawdown option, your money stays invested and it has the potential to go up or down. You need to ensure that your fund will provide an income for the rest of your lifetime, so independent financial advice around how to structure your investments in line with your personal circumstances and your attitude to risk, is paramount.