Once you reach the age of 55 (rising to 58 in 2028), you can start to take money from your private or workplace pension, if you wish. You can do this by withdrawing it all as a lump sum, buying an annuity or using pension drawdown.
So what’s the difference between an annuity and pension drawdown? To help you consider your options, let’s take a quick look at the pros and cons of each of them.
What’s an annuity?
A pension annuity is a product that pays you a regular, guaranteed income for a fixed period of time or for the rest of your life. You buy an annuity from an insurance company, and the amount you receive is determined by your annuity rate.
Your annuity income will depend on variables like your age, health and where you live. The older you are, the higher the annuity rates you are usually offered. There are several different kinds of annuity available, so you can choose the one that suits you.
- The pros of an annuity: An annuity gives you the peace of mind of knowing exactly how much money you have to live on – no matter what the financial markets may do.
- The cons of an annuity: Once you’ve set up your annuity it’s not possible to make any changes, so it is important to shop around and ensure you have bought the best product for your needs.
What’s pension drawdown?
With pension drawdown, you leave your money invested, and take money from it as and when you need. You may decide to take out a regular sum (for example, by following the 4% rule), or just out your money on an ad-hoc basis.
- The pros of pension drawdown: Pension drawdown is completely flexible. You can take out as much or little as you wish, when you like. And all the time your money is invested, it could continue to grow.
- The cons of pension drawdown: You won’t have a guaranteed income, and the size of your pot can increase or decrease, depending on how your investments perform. It may not last you your entire life.
Which is right for you?
So is an annuity or pension drawdown better for you? The answer to this will depend on what is most important to you.
If you prefer the peace of mind of knowing how much you have to spend each month, and the guarantee of a pension for life, you might lean towards choosing an annuity. But if you are retiring young, or want more flexibility and freedom in managing your money, you might decide that pension drawdown is a better option for you.
You could also decide to combine both options for a ‘best of both worlds’ solution, and use a portion of your pension pot to buy an annuity for a guaranteed income, then invest the rest in a drawdown plan, which can give you flexibility and the potential for growth.
If you’re not sure what to do, we recommend speaking to a financial advisor, who can look at your specific situation and future needs, and help you come up with a plan that works for you.
