Updated: April 16, 2024
Pension Drawdown Vs Taking an Annuity
Want to understand the key differences between pension drawdown and annuities? Read on to find out everything you need to know.
Ask a quick question
We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions Ask us a question and we'll get the best expert to help.
No impact on your credit score
Since the government made changes to private pensions in 2015, choices at retirement have increased significantly. We aren’t obliged anymore to simply swap our savings for an annuity – now there’s the option to take a tax free lump sum and to take money out of your pension flexibly to suit you, known as pension drawdown.
With more options though can come more uncertainty. In this article we’ll compare the key features of annuities versus pension drawdown, discuss how your income from each is calculated and look at how an independent pensions advisor can help you make the right choice.
What is the difference between pension drawdown and an annuity?
An annuity is what many people think of when they think of pension income. When you purchase an annuity you essentially buy a guaranteed income. Your provider will look at your health and lifestyle, make assumptions about your life expectancy, and offer you a fixed, regular income in exchange for your pension pot. With a lifetime annuity this income continues for your whole life. If you opt for a fixed term annuity you will get more money on a monthly basis, but only for a set number of years. You can also include different ‘add-ons’ such as indexing and spousal pensions.
With pension drawdown, sometimes called flexible retirement income or flexi-access drawdown, you opt instead to simply take money from your pension pot as and when you choose to. The rest of it remains invested and continues to grow, but once it’s gone you stop being able to take an income. If you run out of money before you die, that’s it.
With pension drawdown, you can choose to take your whole pension as follows:
- part as a lump sum
- have regular income drawn from it
- receive a series of lump sum payments
Speak to an expert today
Which one should you choose?
There’s no one size fits all solution when it comes to comparing pension drawdown and annuities, and deciding which one is right for you will depend on your unique set of circumstances and your goals for retirement.
There are advantages and disadvantages of both, and it’s important to consider how important each of these factors is to you personally when you’re thinking through your plans.
The main advantages of an annuity versus pension drawdown are:
- You know exactly where you stand, with a fixed regular income every month, regardless of how long you live.
- You have the security of knowing your pot is never going to run out.
- You have the flexibility to add protection against inflation or to purchase a joint annuity, giving security to a remaining partner when one dies.
- You can purchase a guarantee period so that your annuity will continue to be paid out for a set period of time if you die within the guarantee period.
The main advantages of pension drawdown over an annuity are:
- It gives you more flexibility and control over how much of your savings you take out and when. This might suit you if you are still working part-time for instance, or work sporadically.
- Your unused funds remain invested, so your funds have the potential to benefit from growth and increase the value of your pension pot even after you’ve stopped paying into it (although this is not guaranteed).
- Because you have control over what you take when, you can have more control over how much tax you need to pay.
- When you die, any remaining funds can be passed down to your beneficiaries. Standard annuity products simply stop when you die, with no death benefits paid, regardless of how much money has been paid out. It is possible though to add protection to an annuity to mean this doesn’t happen, although at an additional cost.
There is also the option to choose both, taking some of your pension pot to purchase an annuity and leaving the remainder in the fund to draw down from more flexibly.
How a pension advisor can help you decide
A pension advisor with expertise in both pension drawdown and annuities is going to be absolutely invaluable in assessing your needs, making projections for your future and helping you make the best choice. They can help you model different financial scenarios, provide bespoke income estimates for each option, and help you weigh up the pros and cons.
If you decide to opt for an annuity, their market knowledge will be vital. Many people assume that annuity rates are standard across providers, but shopping for an annuity is much like comparing insurance providers, with terms, features and the income you can get varying significantly depending on where you go.
If you opt for pension drawdown, your choice of investments is crucial, so you are likely to benefit from the advice from a pensions expert on both your asset mix and on how much you can sustainably take out of your pension to ensure it supports you for as long as you need. You might also want to consider transferring your pension to another provider – not all providers offer pension drawdown and the terms, charges and range of investment options can also vary. Your advisor can help here too, comparing products and helping you make the most of your pension savings.
Get in touch now and let us arrange a free pension review with an independent advisor.
Reviews
Very professional and efficient…
Very professional and efficient service! Would definitely recommend.
Hannah R
Prompt service
Prompt service and good range of products!
Jonathan W
Excellent service
Excellent service so far OMA set us up with a broker and within 2 days we have an AIP. 5 star service!!!
Terrance W
How income is calculated on an annuity versus pension drawdown
It’s hard to give examples to compare how much you could expect to get from an annuity versus pension drawdown, because there will be so many variables at play depending on your personal circumstances and the specific features you want to include in your product. It’s definitely not as simple as saying you can expect a higher income from one over the other.
How much can I get from an annuity?
When calculating what returns you could get through an annuity, your provider will estimate your life expectancy based on factors including:
- Your age
- Height and weight
- Smoking and drinking habits
- Any existing medical conditions
- Whether or not you want to protect your annuity income from inflation, and if you choose to link the protection to RPI or have a fixed annual rise.
- Whether you want your annuity income to be protected which will allow your annuity to continue being paid out when you die should you die within the guarantee period.
- Whether or not you have a partner and therefore want a single or a joint annuity.
How much can I get from pension drawdown?
Because pension drawdown is very much in your hands, it’s up to you how much you take from your pension fund in any given year or month. The key factors that will determine how much you take out are how much money you have in your fund and how long you feel you need it to last.
Your fund value will be determined not just by the amount you had when you started to take money from it, but how your investments then continue to perform and by how much the fund value increases (or decreases) during your retirement.
If you’d like to see a variety of pension drawdown examples and what income your fund could return as an income, click on the link to find out more.
Speak to a pension drawdown specialist
Choosing how to take funds out of your pension for retirement is a big decision, and not something to be entered into lightly. If you’re unsure of the best path for you then get in touch today and let us match you with an independent pensions advisor for a free pension review. Your advisor will look at your current circumstances and your aspirations for retirement and help you decide whether an annuity or pension drawdown is best for you.
Give us a call on 0808 189 0463 or make an online enquiry and we’ll quickly assess your situation and arrange a free of charge, no obligation chat with an appropriate advisor.
Ask a quick question
We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions Ask us a question and we'll get the best expert to help.
Tony Stevens
Finance Expert
About the author
Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. 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.
