In the years prior to 2011, it was compulsory to purchase an annuity plan by age 75. However, this requirement has been since abolished. Annuity involves you selling your pension to an insurer upon retirement, who will then pay you a guaranteed fixed income up until your death. An annuity plan could benefit you, for example if you were to live longer than expected, you could potentially receive more money than was in your original pension fund. On the other hand, you could technically lose money if you were to die relatively early.
For some handing over hard earned capital is a difficult pill to swallow. There are a few annuity alternatives available, most notably income drawdown.
There are two types of income drawdown:
This allows you quite a lot of flexibility in terms of how you manage your funds. You would normally have the option to take up to 100% of the limit for your age group, as set out by the government. If you were to die with money left over, your heirs could inherit this fund. You also have the opportunity to cancel this and buy an annuity if you change your mind.
If you receive a pension income of at least £20,000 per year, you could be eligible for flexible drawdown. This allows you to make as many withdrawals from your pension as you like, without capped limits.
As with annuity, income drawdown carries considerable risks. Most notably investments can go down as well as up, and in these uncertain times there are no guarantees that your pension fund will not be affected by falling stockmarkets. You may also be subject to investment charges which over time can have an erosionary impact on your pension fund.
If you are considering an alternative strategy for funding your income in retirement you should seek independent advice:
Important Risk Information:
This website contains information only and does not constitute advice or a personal recommendation in any way whatsoever. The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. The tax efficiency of ISAs is based on current tax law and there is no guarantee that tax rules will stay the same in the future.
Different types of investment carry different levels of risk and may not be suitable for all investors. Please ensure that you read the Important Risk Information for further details. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment and should read the product literature. If you are in any doubt as to the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.