If you're approaching retirement age, chances are you're thinking about how to secure a decent income throughout your post-work years. The recent pension reforms may give you more options, but the age-old question remains – will you choose an annuity or income drawdown?
Either one of these options could be suitable depending on your individual requirements. Of course, this is always assuming that you don't take the whole pot as cash to spend however you choose, but by all accounts, figures suggest that most people are still leaning towards the two former options.
For many, the security of an annuity will still be too good to resist. An annuity will give you a guaranteed payment for the rest of your life, something that no other retirement income solution can offer, so although annuity rates have been falling quickly in recent years, many people still want that kind of guarantee.
But, that's not to say that they're the be-all and end-all. In fact, pension providers are reporting a growing uptake in drawdown plans, with many pensioners seeking to take advantage of the freedoms and opt for a slightly more flexible arrangement. Drawdown allows retirees to take an income from their pot while leaving the remainder invested, and for many the risk of spending their pot is outweighed by the chance to remain in control of their money and seek higher investment returns.
Interestingly, there's a growing gap between the purchase fund size for annuities and drawdown – and it's increased almost threefold since the launch of the reforms. The figures, from My Pension Expert, show that from April 2014 to April 2015, the average drawdown fund size was 17% higher than that of the average annuity fund. However, since the pension freedoms became active in April this year, this disparity has risen to 46%.
"We've seen a big surge in the popularity of drawdown products, predominantly with those with larger pension pots," said Scott Mullen of My Pension Expert, "[which] is directly responsible for the results of our latest research." He points out that those with larger pension pots are generally more willing to take on the risks of drawdown, with a similar pattern emerging in terms of a willingness to monitor finances. This has led to the increased disparity, as those with larger pots are now freer to consider drawdown as a means of income.
Are you one of the many now considering this form of retirement income? If so, it's vital you understand the risks involved as well as the benefits, and that applies to those considering annuities, too. Make sure you fully educate yourself on the pros and cons of each, and ideally, head to Pension Wise (and an independent financial adviser thereafter) to get a better understanding of the type of solution that'd be right for you.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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