Pension Drawdown vs Annuity

If you are nearing or in retirement, you may be wondering whether to choose pension drawdown or an annuity to take an income.

The difference between an annuity and drawdown is that annuities offer a guaranteed regular income while drawdown offers greater flexibility and the potential for investment growth.

Learn more in this guide to income drawdown vs annuity.

What’s The Difference Between An Annuity And Drawdown?

The main difference between drawdown and an annuity is the flexibility, or lack of, each one offers: 

  • Pension drawdown – Enables you to take lump sums and/or income and keep the remainder invested. This comes with the potential to increase or decrease in value, subject to market fluctuations.
  • Pension annuity – Provides you with a regular, set income for life or a defined period. You can use all or part of your pension pot to purchase an annuity.

Drawdown Or Annuity – Which Is Best?

So, is drawdown better than an annuity? There is no definitive answer to that question. As ever, it largely depends on your circumstances, including your lifestyle, attitude to risk and retirement planning goals. 

An annuity provides a low-risk, guaranteed income with the potential for enhanced benefits when you purchase the insurance product.

Drawdown offers a higher risk than an annuity yet more flexible option that gives you the opportunity to grow your pension savings, take an income when you need it, and pass on your money to selected beneficiaries when you die.

Speaking to an independent financial adviser is the best way to reach an informed decision about whether to opt for pension drawdown or an annuity.

Our financial advisers can provide impartial advice to ascertain the most effective route to achieve your retirement goals.

What Are The Advantages Of An Annuity?

  • A guaranteed income for life.
  • Financial security and peace of mind.
  • Unaffected by market volatility.
  • Very little management needed.
  • Enhanced benefits if you are in ill health or deemed at risk by the provider when purchasing.

What Are The Disadvantages Of An Annuity?

  • Income is tied to current annuity rates, which aren’t always generous.
  • Once you have bought an annuity you cannot change your mind.
  • Annuities cannot be inherited, although a joint annuity often pays an income to a spouse.
  • Your income is fixed and inflexible, although some policies pay out more over time.
  • There is no opportunity for investment growth to increase your retirement income. 

What Are The Advantages Of Pension Drawdown?

  • You can take your income flexibly, increasing or decreasing it accordingly.
  • The invested portion of your pension pot has the potential to grow.
  • You can pass on any remaining savings to your selected beneficiaries.
  • You retain control of your pension pot and can even buy an annuity at a later date.
  • You can withdraw larger lump sums if you require money for big outlays.

What Are The Disadvantages Of Pension Drawdown?

  • If you are not careful, there is a real danger that your money could run out.
  • Investments are subject to market fluctuations, so they can go down as well as up.
  • Drawdown requires more ongoing management, either by you or an adviser.
  • Fees and charges associated with pension drawdown can erode your savings.
  • Drawdown does not provide enhanced benefits if your health fails in later life, although you can purchase an enhanced annuity with your pension pot should you wish.

Annuity And Drawdown Comparison

Features Annuities Pension Drawdown
Low risk
Growth opportunities
Regular income
Easy to use
Guaranteed income
Enhanced in ill health

Should I Choose An Annuity Or Drawdown?

Only you can answer this question. However, you needn’t go it alone when choosing between an annuity vs drawdown.

Whether you’d prefer the reliability of an annuity or the flexibility of pension drawdown, our financial advisers can give you the support, recommendations and guidance you need to choose the right option for you.

They will also be able to scour the market to find you the best annuity rate and provider for your needs. Learn more about Hilltop’s Pension Drawdown service.

Annuity And Drawdown Combined – Is It Possible?

Yes. The good news is that there is plenty of scope to combine an annuity with pension drawdown – it doesn’t necessarily have to be a choice between an annuity or drawdown pension.

For example, rather than buying into a lifetime annuity you might choose to: 

  • Purchase a fixed annuity and then consider your options at the end of the term. 
  • Take pension drawdown and purchase an annuity later in life or via a ‘deferred’ annuity.
  • Combine an annuity and drawdown at the same time (if your funds allow) for the best of both worlds.

Annuity vs Drawdown Frequently Asked Questions

Can I Switch From Pension Drawdown To An Annuity Later In Retirement?

Yes. If you find that you would rather have the security of a guaranteed income later in life, you can choose to purchase an annuity.

A deferred annuity is an excellent option if you are worried about your drawdown funds running out. It enables you to purchase an annuity that pays an income from a specified age, providing extra peace of mind.

How Do I Determine The Right Income Withdrawal Rate For Pension Drawdown?

The right income withdrawal rate for pension drawdown depends on your specific circumstances. It is important to remember that your pension savings need to last for the rest of your life.

Therefore, you should try to be prudent wherever possible and resist the urge to take too much too soon. The best way to decide the most appropriate income withdrawal strategy is to speak to a financial adviser to ensure you are making an informed decision.

What Factors Should I Consider When Choosing Between Pension Drawdown And Annuity?

The main factor to consider when choosing between pension drawdown and an annuity is whether you would prefer a guaranteed income or a flexible income.

You should also weigh up whether you are willing to invest a portion of your pension pot with pension drawdown, and the potential for growth and loss that implies, or whether you would prefer the more low-risk (and potentially less generous) returns of an annuity. 

What Happens To The Remaining Pension Funds In Pension Drawdown After My Death?

With an annuity, unless you have taken out a joint annuity, when you die any remaining funds are kept by the insurer.

In contrast, if you die before the age of 75 and have opted for pension drawdown, any remaining funds can be passed to your chosen beneficiaries tax-free.

If you die after the age of 75, the remaining money can still be inherited by your loved ones either remaining in the pension or added to their income and taxed at their marginal rate.

Are There Any Restrictions Or Eligibility Criteria For Purchasing An Annuity?

Yes. There are some restrictions and eligibility criteria to consider before purchasing an annuity. You need to be at least 55 years of age and most schemes will specify a minimum amount of pension savings (after you have taken the tax-free sum).

Your health and lifestyle will also be weighed up by your insurer. If you are in poor health or make certain lifestyle choices, you might be eligible for a higher income on the assumption that you won’t live as long.

Pension Drawdown Advice

Learn More About Pension Drawdown

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Important information: Our website offers information about investing and saving, but not personal advice. If you’re not sure which services are right for you, please request advice from Hilltop’s financial advisers. Remember that investments can go up and down in value, so you could get back less than you put in.

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