Are you having trouble deciding between investment growth and a guaranteed pension when it comes to your retirement plans? The good news is that you don’t actually have to choose just one way to receive retirement income. Learn about the pros and cons of both ways to help you make your decision.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
Figuring out what to do with your amassed pension pot is an important decision that will have a long-standing effect on your retirement. One option is pension drawdown, which provides you with a bit more freedom and flexibility in how you choose your annual income. But with annuities, you get a steady income and greater financial security. With benefits to both options, you’ll be pleased to know that you don’t have to choose one or the other. By pursuing a combination of the two, you can get an annuity with part of your pension and keep the remaining portion in a drawdown agreement.
How to decide what’s right for you
Whether you go with a drawdown or an annuity will depend on your individual circumstances and needs. When considering your decision, you’ll need to keep in mind your health, projected life expectancy, attitude towards risk, investment experience, and financial situation. With so much to factor into your decision, it can be complicated and difficult to reach a decision that’s best for you. Do you prefer the security of knowing your income is guaranteed for life? Or do you prefer the freedom and flexibility of drawdown?
Annuities
Annuities provide guaranteed lifetime income but they are not without risk. If you pass away shortly after purchasing an annuity, you won’t be able to benefit fully from the upfront payment. If you have health issues that might shorten your life expectancy, annuities might not be right for you.
Compared to past rates, the current annuity rates are more favourable so they’re attracting attention from those previously deterred by low returns. Since they are unaffected by investment fluctuations, annuities offer long-term security with income that is guaranteed for life. Some policies even guarantee indexation to keep up with inflation.
There are downsides, though. During periods of low interest rates, your annuity will be affected. And since you are on a fixed income that cannot be adjusted, if your circumstances ever do change, your income won’t.
Drawdown
Pension drawdown offers more flexibility and control than annuities. Retirees that have opted for drawdown are allowed access to their pension fund tax-efficiently and they are able to make withdrawals as needed. They’re a great option as they’re exempt from Inheritance tax as long as you don’t exceed your personal allowance. Plus, they provide the freedom to make personal decisions.
However, this option also carries risks such as market volatility and uncertain income from investments. And if you withdraw too much, it can lead to tax liabilities.
Speak to a professional for the best plan
As you can see, there are benefits to both, but don’t forget, you don’t have to choose one or the other. Seeking professional advice is crucial before committing to any plan, considering individual circumstances and policy terms. Consider all pros and cons before choosing a retirement strategy tailored to individual needs and circumstances. Get in contact with the experts at Dental & Medical Financial Services to plan out your retirement today.