An annuity provides certainty in retirement, but lacks the flexibility drawdown can provide. With pension drawdown there are no guarantees the income you draw will be stable for an extended period of time as when you reinvest your pension savings they become vulnerable to market performance. Annuities, on the other hand, can be used to guarantee an income for various periods of time.
A lifetime annuity is used to provide a regular income for life, and will continue paying out no matter how long you live. Temporary annuities pay out on a temporary basis, providing a guaranteed income for a set period of time. The type of annuity you purchase will determine whether it continues to pay out after you die. If you purchase a single-life annuity it will only pay an income to you, the sole beneficiary, and after you die all remaining funds will be kept by the insurer.
However, if you purchase a joint-life annuity you can nominate a spouse or partner to receive income payments on your behalf until they die. Where drawdown is concerned, remaining funds will be reinvested and for an annuity remaining funds will be used to purchase an annuity product. Income tax will be applicable on whatever further income your draw, in line with current income tax rate thresholds.
Find out more on our dedicated How does pension drawdown tax work page. PensionBee offers a range of services that can combine all of your pensions into one simple plan.
Drawdown from PensionBee offers a hassle-free way to take cash from your pension whenever you need it. In contrast to drawdown, an annuity guarantees that you receive a regular income throughout your life, which is determined by your annuity rate.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice. Get started in 5 minutes. Why not take a look now and see how easy it could be to take control of your pensions? Get started now. Have a question? Call our UK team Pensions explained Pension types.
Pension basics Introduction to pensions What is a pension? What is a pension fund? How do pensions work? If you opt for drawdown, you can still purchase an annuity later down the line. There is no investment value to pass to loved ones on your death.
However, at outset, you can buy a residual pension for your partner for the rest of their life. Also, at outset, you can buy either, a guaranteed number of income payments so that on death any unpaid income is paid out. Alternatively, you can buy protection of the purchase price, which on death will pay the balance of the purchase price less the income paid. On your death, any remaining funds in your pension pot not spent as income will be available to your beneficiaries.
The tax position of payments is determined by your age at death. Up to age 75, they are generally payable tax-free to the successor. If you are over 75, they will be taxed at the marginal rate of the successor. The value of the funds is unlikely to form a part of your estate for Inheritance Tax purposes. You must complete a nomination form to ensure trustees understand your wishes on death.
Deciding how you use your pension pot when you reach retirement age can be complicated. The best choice for you depends on various factors.
A financial adviser can explain the different options to you, review your individual situation and help you make the right decision. This article is for information purposes only and is not suggesting a suitable investment strategy.
Always seek financial advice before taking any action. This is usually not recommended as you would lose out on a number of ancillary benefits which typically outweigh what you could receive from a personal pension plan.
That said, there are circumstances in which it might be viable, such as contracting a life-limiting illness or running into financial difficulties. This is probably the main difference between the two options. An annuity can provide you with a guaranteed income either for the rest of your life Lifetime Annuity or fixed for a set number of years Fixed Term Annuity. Income drawdown will only provide an income for as long as there are funds still remaining in your pension pot.
Once all of the funds have been used your income will stop. Income drawdown gives you complete control over when you want to receive pension payments whereas an annuity will make regular payments as agreed at the outset either for life or for a fixed term.
There are also tax potential tax benefits to consider. For instance, with drawdown you can vary the amount you take which can give you control over how much tax you pay. If you die with funds still remaining in your pension pot with income drawdown your family will inherit this money. If you purchase an annuity which is guaranteed for life then the income will cease at the point when you die unless you have a joint-life annuity where the surviving member will still receive an income.
When you take income drawdown withdrawals the remaining funds can still benefit from investment growth. With an annuity you effectively hand over control of your fund to your provider in exchange for an income for life or a fixed term. Both options share common traits. The amount of income you receive is determined by the annuity or income drawdown rate tables used by your provider.
With either a Lifetime Annuity or a Fixed Term Annuity you have the peace of mind of knowing you will receive an income every month for the rest of your life or for a set period. This allows you to plan ahead and be able to budget accordingly knowing the money will never run out.
There will be ongoing charges for managing your investments. Rules set by HM Revenue and Customs mean that the amount of income you take out of your pension fund has to be reviewed regularly. There are charges for this as well.
Make sure you are aware of how much income drawdown will cost you when you are deciding on this option. You will have to make sure that the investments grow enough to cover the extra costs. Income drawdown can be useful if you're not ready to take all of your pension straightaway, for example where you're planning to carry on working part-time. However, income drawdown is really only suitable if you're happy to leave your pension fund invested in the stock market so that it has a reasonable chance of growing.
This makes income drawdown a high risk choice because the stock market can go up or down. You could end up with far less income than you've planned for.
For this reason, you'll probably only want to consider income drawdown if you have a large six figure pension fund or you'll have enough other regular income during your retirement.
For example, you might have income from other savings or investments. If you have a workplace money purchase pension and want to take the income drawdown option, some providers might insist you change your pension to a personal pension. You may need to take financial advice to see if this is a good option for you. For more information about workplace money purchase pensions, see Workplace pensions. For more information about finding an independent financial adviser, see Getting financial advice.
From 6 April , the 'death tax' on pension funds was scrapped. This means if you die before age 75 with all or some of your pension fund still invested, it will pass to your beneficiaries tax-free. If you're 75 or over when you die, your beneficiaries can either draw money from the pension as an income, or take the fund as a lump sum. Both options will be taxed. These changes apply to payments made on or after 6 April , rather than to deaths on or after 6 April An independent financial adviser can help you decide what's the best way for you to provide for family and friends after you die.
For more information about where to get advice about your pension options, see Getting financial advice.
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