Today’s pension advice problem. Should I buy an Annuity or go into Drawdown?

If you’re approaching retirement, you’ve probably looked at what you can do with your pension pot and seen these two options; Annuity vs Drawdown.  These are very different choices and can create a very different retirement for you, but how do you choose the right option for you?

Guaranteed and Flexible Retirement Income

I think these two terms are much more helpful than Annuity and Drawdown.  An Annuity is a type of Guaranteed Income.  This means that no matter how long you live, even to 120 years old you will always get paid this money.  Other examples of guaranteed income are final salary pensions and the state pension.  Annuities are a guaranteed income that you buy.  You can take your pension pot and purchase an annuity.  The great thing about this is that it gives you certainty and security over the amount of money you’ll have.

Pensions drawdown is an example of flexible income.  It’s a pot of money that you can use as you like throughout your retirement.  This means that you can take a regular income and change that amount whenever you want, but you could also take it in large or small chunks of cash.  ISAs, savings accounts are other examples of the same thing.  They are money you have invested somewhere that you can use as you like.  The great thing about this is the flexibility and the larger amount of funds you have at your disposal.

But which one is right for me?

The vast majority of people at the moment choose drawdown and I think there are two reasons for this.  Firstly, it’s great to have a big pot of money!  When in your life have you had a six figure sum to spend??  And secondly, the price of annuities has been low for quite a long time, perhaps giving you around £4,000  per year for every £100,000 you have, which isn’t very inspiring.  However, one of the reasons you don’t get a lot of money via an annuity is that you might live a very long time.  Retirement could easily be 30 plus years.  It’s very important to think about how much money you will need in retirement, particularly your essential expenditure which you must be able to cover to live your life.  If you can cover this with guaranteed income, then you can think about whether you want more flexibility with the rest of your pot.  And please think, even though it’s great to have a large pot of money to spend, remember this might have to last you more than 30 years, so invest that money wisely!

I’m a Pensions and retirement nerd and would love to talk you through your options if you are interested.  Parker Financial Advice is independent (IFAs) based in Cheltenham, who choose products from the whole of the market.  We want to be your trusted advisers for 20, 30, and 40 years… for life.  Get in touch with us if you’ve got something on your mind or want to get a plan in place, or read about our at retirement reviews: https://www.parkerfa.com/at-retirement-recommendation