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. Whilst a lifetime annuity is appealing for complete peace of mind, it is not the only option available to you. There are a few different variations, namely:. A pension drawdown offers you complete control of how much and when you withdraw your money. This allows you to control your pension fund and adapt your retirement income to changes in your life.
You may not need as much income during the early stages of your retirement but more as you get older. Pension drawdown will be able to cater for this requirement. Pension problems Complaints, financial help when retired, changes to schemes. Pensions basics Starting a pension, types of pension, understanding pensions. State Pension How it works, what you might get, National Insurance.
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What is flexible retirement income pension drawdown? Tax relief on future pension saving Can you continue contributing to a pension if you move into drawdown? Pension recycling Means-tested benefits and debts Death benefits Is pension drawdown better than an annuity?
What drawdown was available before April ? Your other retirement income options. How pension drawdown works. Back to top. Changing your mind. Got questions about how your pension can be paid? How much income to take. You can use our calculator to help you think about how much income to take.
How to invest your pension pot. As with all investments, the value of your pot can go up or down. Shopping around. Deciding whether pension drawdown is the right option for you is complicated. Use our investment pathways comparison tool. For help finding one, search our directory on our page Find a retirement adviser. Do you pay income tax on pension drawdown? Find out more in our guide Lifetime allowance for pension savings.
Tax relief on future pension saving. Find out more in our guide The annual allowance. Can you continue contributing to a pension if you move into drawdown? These are designed to prevent people from getting further tax relief on contributions where they have already benefited from tax relief. You could be affected by the pension recycling rules if you plan to use some or all of your tax-free lump sum to significantly increase contributions to a pension.
Find out more about pension recycling from HMRC. Pension recycling. Find out more, including a directory to help you find one, in our guide Choosing a financial adviser.
Means-tested benefits and debts. Taking money from your pension may affect your eligibility for means-tested state benefits. Find out more about how benefits can affect pensions at GOV.
Find out more in our guides: Where to get free debt advice Using your pension to pay off debts. Death benefits. The money must be paid within two years of the provider becoming aware of your death. If the two-year limit is missed, payments will be added to the income of the beneficiary and taxed as earnings. If you die after the age of 75 and your nominated beneficiary takes the money as income or a lump sum, the money will be added to their other income and taxed as earnings.
Is pension drawdown better than an annuity? Capped drawdown. These policies were available before April You might still have this type of policy. If you set up a capped drawdown arrangement before April You can continue to use your capped drawdown arrangement in the same way.
You can switch into a new drawdown policy, so you can draw more than the cap. Check if your provider allows this. This will depend on your age, health and a variety of other factors, such as the size of your retirement fund.
There are no restrictions and you can take all of your pension pot in a lump sum. Is this income guaranteed for life? Is there any investment risk? Your annuity is guaranteed for life.
As your pension remains invested there is the chance that your pot could go down due to poor investment performance. Can I change later on? Most annuities will not allow you to change at a later point. If you wanted to, you could purchase an annuity later. What about tax? Annuity income is treated like employment income and is subject to income tax if your total income is above the income tax threshold. Income taken directly from the fund is also treated the same as employment income.
So if you take all your pot in one go, that along with any other taxable income you had would dictate what income tax rate you would pay on the fund. Are there any other options? You could opt for a part and part option, purchasing an annuity with some of your pension pot and leaving some invested and withdrawing an annual income. This could provide an inheritance for your family providing you have not drawn your entire pot as an income.
What is an annuity? What about income drawdown? Find a financial adviser near you Find a qualified, independent and regulated financial adviser in your area to help you make the right decisions about your financial future. Find a financial adviser. The advantages and disadvantages of drawdown However, there are some crucial risks with not buying an annuity and leaving your pension invested. Boosting your retirement income with equity release If you are 55 or over and own your own home, you could consider using equity release to significantly boost your retirement income.
Learn more about equity release. Moneyfacts tip Moneyfacts tip. Guide contents Pros and cons of taking or not taking an annuity What is an annuity? The advantages and disadvantages of drawdown. Related Guides. Cookies Moneyfacts. I accept.
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