Alternatives To Annuities
With the new pension freedoms introduced in 2015 there is now much more you can do with your pension than get an annuity. Below are just some of your options.
Just taking your money
It is now possible to simply contact a financial adviser and have them get you all your money from your pension provider. This sounds a wonderful option but sadly this money would be taxed heavily as it is classed as your income for that year. For example on a one hundred thousand pound pension pot you would need to pay just over twenty one thousand in tax. There are ways to reduce the tax bill including taking out the money in smaller chunks over a longer time please contact us if you wish to discuss this however this is not the only drawback.
Deferring your annuity
Not exactly an alternative product but one option as opposed to taking an annuity is to not take an annuity. There are several advantages to stalling the beginning of your annuity which are worth considering. The government offers a reward for deferring your state pension “your State Pension will increase by 1% for every 9 weeks you put off claiming. This works out as just under 5.8% for every full year” So by holding back on your retirement for one year you will receive more money for the rest of your life.
In terms of your personal private pension it is of course beneficial to keep paying in rather than withdrawing which deferring allows. It is also worth noting that if you are older when you begin collecting your annuity you are more likely to receive a better price.
A further option is to keep your money in a pension fund and draw an income from it directly. You can decide the level of income you receive and change this as you circumstances alter. However, unlike an annuity, your money can run out if you take too much or the investment doesn’t perform as expected. This option is called a flexible access drawdown, or drawdown for short. As a drawdown pension fund remains invested you will find that your overall fund can go down as well as up. It is important to consider an investment that is right for you. Please see our Drawdown section for much more information on this.
A flexible income can be very appealing. However, you may want the security of an annuity, but don’t want to be tied in for life. There is a version of drawdown that provides a guaranteed income for a fixed number of years. After this, the income will stop and you will have the opportunity to choose which option to take with the remainder of your pension fund (known as the guaranteed maturity value). These types of drawdown are sometime known as fixed term annuities.
To get more information about annuities, please continue to browse our advice centre.