![]() ![]() The second way is to start off with all of your pot in drawdown, and buy an annuity later in retirement with all or some of the remaining pot. The first is simply to divide your pension pot in two (perhaps equally, perhaps not) and buy an annuity with one portion, and leave the other invested in drawdown scheme. There are two main ways in which you could combine drawdown with an annuity. A combination of the two may provide you with the right balance of flexibility and security that you need. The question ‘Annuity or drawdown?’ is often presented as an either-or choice, but in practice there is no reason why you can’t have both. ![]() You hope to leave your family a larger inheritance if you die prematurely.You want access to larger sums in an emergency.You expect your spending needs to vary over time.You are prepared to take some risk in return for a potentially higher income.You don’t expect your spending needs to vary by much over time.You don’t want the burden of managing your pension.You like the reassurance that comes from a guaranteed income for life.Here are the main things that might influence your decision. The question of whether drawdown or an annuity is better will depend on your own individual circumstances. You need to be aware of this risk when considering drawdown as an option. But when stock markets dip, they can shrink your drawdown pot by a large amount, reducing both your income and how long it might last. During periods of stock market growth, you could expect higher income from drawdown than from an annuity. Here, it is impossible to give a definite answer. The final point of comparison is the overall level of income you can expect from an annuity or from drawdown. Here you can see the main features of these pension products rated side by side. There is no guarantee you will get a better income than from an annuity.A drawdown scheme needs ongoing management (by you or your financial adviser).Your pension pot stays invested, so is vulnerable to stock market falls.You keep control of your pension pot (so you could change your mind and buy an annuity later).Your beneficiaries can inherit any remaining funds tax-free.You can take larger lump sums if you wish.You can increase (or decrease) your income whenever you like. ![]() Any unspent funds can be passed on tax-free to your beneficiaries when you die. You can draw out as much or as little as you like (provided the money is there), and these withdrawals are taxed as income. Once you’ve bought an annuity, you can’t change your mind or trade it inĭrawdown is a way to take an income from a pension pot that stays invested in the stock market.An annuity can’t be inherited on your death (though you can choose one that continues to pay a reduced income to your spouse).Your income is inflexible (though you can choose an annuity that increases over time).Your income is limited by the annuity rates on offer (which may not be generous).It is unaffected by changes in the stock market or economy.It maintains the same level of income (or increases).What are the pros and cons of an annuity? Furthermore, if you have health problems you may be offered a more generous annuity (called an enhanced annuity).Īnnuity income is taxed in the same way as ordinary income. You can also buy joint life annuities that cover both you and your spouse. Some pay a fixed income, while others pay an income that increases over time (this can help fight inflation). Various different types of annuities are available. This means that if you live a long time, you may get back more than you paid for it. The annuity income is not limited by a pot of money, so will continue paying out until you die. It is a contract with the annuity provider (who will be an insurance company) to provide you with this income, in exchange for a lump sum at the start – which usually comes from your pension pot. What is an annuity?Īn annuity is a product that pays you a guaranteed income for life. So, let's analyse the key difference between a drawdown and an annuity below. This side-by-side comparison of annuities and drawdown will familiarise you with the pros and cons of each, helping you to make the right choices when you access your pension. When accessing your pension, should you opt for drawdown or an annuity? It’s the retirement dilemma of our age: do you play it safe with a steady income for life, or go for flexibility and take a higher risk in the hope of receiving more? ![]()
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