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When it comes to your financial future, the bad news is there are no easy answers. The very good news, however, is that you have so many options available to you if you’re looking to ensure a secure and comfortable retirement. While it’s always best to consult an independent financial advisor before making any major decisions, understanding some background information about a few of those options can help you put your best foot forward into retirement and beyond. Pension Drawdown vs. Annuity Planning for your retirement can be a very complex process, and it’s sometimes extremely difficult to wade through all the pros and cons to reach an informed decision. (That’s where a financial advisor comes in.) The question whether to opt for a pension drawdown or an annuity is a very common one – and it should be noted from the outset that it depends entirely on your circumstances, lifestyle and what level of risk you may or may not be comfortable with. But the fundamental question you really need to ask yourself in this case is, are you prepared to risk more with the opportunity to gain more, or would you feel more comfortable with a steady income for life? Pension Drawdown Pros and Cons With a pension drawdown you withdraw a certain amount from your existing pension pot to use as income, while the rest of the pot remains invested. Pros - Your savings pot remains under your control - You have the flexibility of how much income you want to draw - You can take out a lump sum if that’s what you want - If you die, the remaining funds can be inherited free of inheritance tax and tax efficiently in terms of income tax. Cons - As your pension pot remains invested, it can fluctuate depending on the market - It’s not guaranteed to give you more income than an annuity - There’s a risk that your money could run out - The fund(s) needs to be managed Annuity Pros and Cons An annuity gives you an income for life in return for a lump sum that you pay at the start of the contract. There are different types of annuities (which is another reason it’s wise to engage an expert to help you) that offer different ways of receiving the income – for example it can be fixed for life or it can be designed to increase over time, to compensate for inflation. Pros - Pays a steady income - Doesn’t need managing - Isn’t affected by fluctuations in the economy or market - It’s an income for life Cons - No real flexibility - Your income is bound by the rates on offer at the time - It’s permanent, so you can’t change your mind - Can’t be inherited (you can arrange for a reduced amount to be paid to a spouse) Help Making the Right Decision Of course the points mentioned above are very general and really only scratch the surface, but they may give you some insight straight away as to whether you would lean towards an annuity or a pension drawdown. While only you can ultimately decide what avenue is best for you in terms of your risk aversion and personal circumstances, with the help of a good independent financial advisor to help you wade through the tax ramifications and any other issues, you can make either of these options work. Author Plate Claire Novakovic is the go-to expert for those who need advice on pension drawdown and other related issues. As a Chartered Financial Advisor, she also holds the relevant FCA permissions to conduct pension transfer business including defined benefit schemes. Accudo Investments offers comprehensive independent financial advice tailored to each individual’s needs, using effective portfolio management and tax strategies to meet the needs identified.
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