What is an annuity?
An annuity is a financial product that you can buy with your pension savings when you retire. There are two main types of annuity: lifetime annuities and fixed-term annuities.
A lifetime annuity will pay you a guaranteed income for the rest of your life and a fixed-term annuity will pay you a guaranteed income for an agreed period, such as five or 10 years. Typically, the older you are when you buy an annuity, the higher the income rates you’ll be offered.
The benefits of annuities
They can give you peace of mind by providing certainty of how much income you’ll have in retirement
With a joint lifetime annuity it’s possible to nominate a beneficiary to receive your payments when you die
Enhanced annuities, which pay out more over a shorter period of time, are available for those with poor health
You can help your savings grow with an annuity that’s linked to investments or an escalating annuity, which pay out larger sums each year, based on a fixed rate or inflation
The considerations of annuities
- There’s no going back on an annuity once you’ve bought it
What is income drawdown?
Drawdown is a financial product that lets you withdraw sums from your pension on an adhoc basis, while keeping the rest of your savings invested.
There’s no limit on how much you can withdraw and when, but the more you withdraw in any given year the more income tax you’ll need to pay. Investments are typically spread in a combination of shares, cash and bonds to provide an ongoing retirement income.
The benefits of drawdown
As long as you have enough money in your pension, you can have complete control of the frequency and value of your withdrawals
You can help your savings grow by keeping your pension invested for as long as possible
If you die before your 75th birthday your beneficiaries can access your pension without paying inheritance or income tax
If you decide drawdown isn’t right for your needs you can use what’s left of your pension to buy an annuity instead
The considerations of drawdown
As drawdown requires ongoing management, you may need to pay drawdown fees which can include admin or management fees and withdrawal charges
Drawdown isn’t guaranteed for life and you may run out of money later in retirement if you withdraw too much or investments don’t perform as expected
Annuity and drawdown taxes
There are two key things that annuities and drawdown have in common. However you decide to cash in your savings, you can take up to 25% of your pension without paying tax. After that you’ll be charged income tax, at your highest rate, on the remaining 75%, whether you withdraw it through an annuity or via drawdown.
When it comes to drawdown tax, you’ll need to be more considerate when taking a lump sum from your pension as it may push you into a higher income tax bracket for the financial year.
Planning your retirement
You don’t have to cash in your workplace or personal pensions as soon as you reach 55. In addition to purchasing an annuity or accessing your pension via drawdown you can also choose to leave your pension as it is.
The longer your money remains invested, the more likely it is that your pension will grow. If you’re over 55 and still working, delaying taking your pension by just a few years could leave you better off in the long-term.
By 2028 the age you can access your private pension is expected to increase from 55 to 57, so if you’re at least a decade away from retirement you’ll need to take this into consideration.
A pension calculator can help you plan your retirement by showing how much you’ll need to live comfortably and what you’ll need to save to achieve your goal. The earlier you’d like to retire, the more you’ll need to save into your pension.
Drawdown from PensionBee is hassle-free. You can manage your account online in just a few clicks and can request a withdrawal by logging into your BeeHive.
This information should not be regarded as financial advice. As always with investments, your capital is at risk.
Last edited: 29-08-2018