‘More suitable’ – Drawdown versus annuity – how to determine what's best for your pension

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There are several pension choice a person can consider later in life, with drawdown and annuities being the two main options. Many Britons will be hoping to pick the option which provides them with the greatest amount of stability and financial help as possible.

With this in mind, Express.co.uk spoke exclusively to Amy Goodall-Smith, director of Goodall-Smith Wealth Management.

She examined the advantages and disadvantages of an annuity versus a drawdown in the current inflationary climate. 

An annuity offers people a guaranteed payment with a set income for life, which Ms Goodall-Smith highlighted as a key advantage.

She said: “The provider you buy the annuity from will look at your circumstances, and your health and work out your life expectancy and calculate a suitable income for you.  

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“You then give them the pension money you have saved up as a lump sum, and they provide you with an income for life.  If you are in poor health you may be able to get an enhanced annuity rate, i.e. more money each year.”

As people are no longer invested, they do not have any market risk which is beneficial for those who like to play it safer.

Similarly, with the income set at the outset, individuals have no control over increasing or decreasing it – which can remove pressures in later life.

In addition, individuals will be able to build in extra guarantees to their income, but Britons should be aware these will cost money, and could leave them with less per year.

Ms Goodall-Smith added: “The extras are things like making sure your spouse gets 50 percent of your income on your death, you can build in inflation into your payment so it rises each year, you can have a guaranteed payment period.”

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Drawdown is the alternative popular option amongst Britons as it allows people to keep their pension invested while withdrawing funds when they need to.

As money remains invested, it can still grow beyond inflation rates – a key advantage.

Ms Goodall-Smith added: “Drawdown allows total flexibility on how you take your income, this is perfect for those wanting a phased retirement.  

“If you cut down your days at work, your income drops and so you can draw a little income from your pension to ‘top up’ your income.”

With drawdown, a pension also remains outside of one’s estate for the purposes of inheritance tax (IHT) meaning this tax will not be applicable if passing a pension on.

Dependents will be able to inherit the pension, which is the value of the pension pot at the date of the person’s death.

In addition, people can continue to make payments beyond their retirement age if they wish, Ms Goodall-Smith highlighted.

However, while many are drawn to this option, it also has some disadvantages.

If a person takes too much money in the early years, they could outlive their fund and will not have enough to last throughout their lifetime.

Ms Goodall-Smith also warned about the investment risk, as the value of investments can go up and down and returns are not guaranteed.

Ultimately, choosing what option a person wants for their pension can be complicated, and advice may be necessary.

The Government offers a Pension Wise service to help, or people could seek their own regulated financial adviser. 

Ms Goodall-Smith concluded: “In the current climate, interest rates are so low and gilt yields are also low. These are the main contributors to determining annuity rates.

“Therefore, most clients find drawdown more suitable to their needs. 

“But it is very much dependent on personal circumstances, a client’s attitude to risk and their capacity for loss. This decision has to be made on a client by client basis.”


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