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Annuities or Drawdown

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When it comes to making a decision on receiving an income from your pension the choices vary greatly and this is a decision that could affect the rest of your life, so it is very important to get this correct. We’re here to help you make an informed decision and get the right result to suit your needs. Call us on 01752 896943 or alternatively, click the button below, and we’ll call you back.

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Annuity

An annuity is when you pass the value of your pension to an insurance company and in return, they agree to pay you a guaranteed income for the rest of your life, most commonly without any investment risk. These are possibly the simplest way to generate an income from your pension fund, but care does need to be taken. Annuity rates are at an all-time low so you would be potentially locking yourself into a low income of which you cannot change. There are many different options to consider when it comes to annuities:
  • Would you like an income which increases with inflation?
  • Would you like an income that would continue to your spouse if you were to pass away? And if so how much?
  • Would you like a guaranteed period?
The more of these options you add to your annuity, the lower your starting income will be. Any income you receive will be taxed at your highest tax rate.

This is a type of annuity which may pay you a higher regular income due to ill-health. You may be a smoker, have a poor medical history or a shorter life expectancy.

It is the advisers’ responsibility to investigate whether you could apply for an impaired annuity so you must be open with your medical history.

Annuities are often offered by the same company that your pension fund is already with. Some pension plans have a guaranteed annuity rate, and this could be better than what is on offer on the open market. An ‘Open Market Option’ is where the value of your fund will be put to several other providers to ensure a better rate cannot be obtained before you retire.

Drawdown

Clients with larger pension funds are tending to opt for a drawdown pension particularly as annuity rates are so low. A drawdown pension allows you to take an income from your pension while allowing the pension fund to stay invested in order that it may still continue to grow.

This works with the pension fund staying invested and thus is exposed to the ups and downs in the markets but allows you to take an income. Drawdown allows you to take any amout from your pension subject to income tax at your marginal rate.

The advantage of a drawdown pension is that you can delay purchasing an annuity and your pension fund could increase if investment performance is good. The disadvantages are that if the investment performance is poor then your pension fund could reduce and with it your income.

Death Benefits

If you were to pass away, depending on which option you had chosen, it will affect the death benefit option.
If an annuity is purchased on a single life basis, then there are various death benefits available, discuss with us to find what's right for you. If the annuity was purchased on a joint life basis, then this income would continue until the demise of the second life. On the second death there is no further death benefit.

If you were to move into Drawdown the death benefits vary depending on whether any benefits have been taken and the age of the individual on death.

It is now possible for any spouse, relative or any 3rd party to inherit the proceeds of a drawdown pension.

Regardless of when death occurs it is possible for the inherited pension to remain in force until the beneficiary wishes to take the benefits.

It is important to check what the death benefits are of any existing scheme compared to any proposed scheme.

The value of investments can fall as well as rise. You may get back less than you invested. Tax treatment varies according to individual circumstances and is subject to change.