Annuity or drawdown: What are the key factors that could help you make the right choice for you?

After working hard and carefully saving for many years, you may now be thinking about your retirement date. Inevitably, this means you’ll need to make a big decision: how will you access your pension savings to create a reliable income for your retirement years?

Since the government introduced Pension Freedoms in 2015, you now have a few options available to you for accessing your pension savings. This usually comes down to choosing between an annuity or flexi-access drawdown, or a combination of both. So, how do you know which option is most suitable for you?

To help inform your decision, read on to learn more about the pros and cons of an annuity versus drawdown.

Annuities can provide security in retirement, but they may not offer the flexibility you need

An annuity is an insurance product you could buy using a lump sum from your pension savings. It provides a guaranteed annual income, usually for the rest of your life.

This has several benefits, including:

• Peace of mind, knowing that you’ll have a guaranteed income each year throughout your retirement
• Your income is usually fixed, meaning that stock market volatility can’t affect it
• You can choose from a range of options, such as linking your payouts to inflation or choosing for payouts to continue for your spouse or dependant after you pass away.

There are many types of annuity to choose from, so if you feel this could be a suitable option for you, it’s important to shop around before you commit. Choosing a product that suits your circumstances, priorities, and goals, could make all the difference for your retirement.  

Despite this, an annuity may not be suitable for everyone. Some of the drawbacks to this type of product include:

• A lack of flexibility: after you’ve bought an annuity, you can’t usually change your mind
• It doesn’t account for changes to your income needs, so if your expenses rise, you may need to find another way to supplement your income
• You don’t allow your pension savings the opportunity to grow any further if you’ve used them to buy the annuity.

Your financial adviser can help you to conduct further research to find out whether an annuity could be suitable for you in retirement.  

Drawdown is a flexible way to access your retirement savings, but it increases the risk of running out of money later on

Another way that you could choose to take an income from your pension savings is by using flexi-access drawdown. This allows you to withdraw a lump sum from your pension as and when you feel it’s necessary.

The drawdown approach has several key benefits.

• You can control the frequency and amount that you withdraw from your pension to meet your changing income needs throughout your retirement
• Your remaining pension funds can stay invested, giving them the opportunity to benefit from potential investment returns over time
• It’s easier to pass on any pension savings you don’t withdraw to beneficiaries free from Inheritance Tax.

It’s important to consider these alongside the potential drawbacks, though. These include:

• You’ll need to carefully monitor your withdrawal rate to avoid using up your pension fund too soon and risking running out of money later on
• Remaining pension funds could fall in value as well as rise, depending on stock market performance.

Though flexibility may be a helpful benefit of this method, the responsibility of maintaining a sustainable withdrawal rate on your retirement savings can be challenging. You must balance your current income needs with your potential future needs.

For this reason, if you’re considering using drawdown, it’s sensible to consult your financial adviser for guidance. They can help you to review your expenses and remaining savings on a regular basis and provide helpful peace of mind that you’re making the most suitable decisions for you.

You may find that a combination of these two methods is a helpful compromise

Of course, the flexibility of drawdown means that you may not necessarily need to choose between this and buying an annuity. You may find that a combination of these two approaches suits you best.

Perhaps you’ll buy an annuity using some of your pension fund and withdraw the rest using flexi-access drawdown. Or maybe you’ll use drawdown in the early years of your retirement, then choose to purchase an annuity later in life if security becomes more important to you than flexibility.

The most suitable decision will be unique to you, and will depend on your personal circumstances, priorities, and goals.

Get in touch

To learn more about how we can help you to create a sustainable retirement income that enables you to achieve your goals, please get in touch.

Email enquiries@jesellars.co.uk or call 01934 875 919 to speak to one of our advisers.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.