Pension income…a choice between stability and flexibility?

Deciding on how you are going to take your pension in retirement is an important decision, and sometimes, a very confusing one! We have found from experience that many approaching retirement are still uncertain of the choices available to them when it comes to finally taking benefits from their hard earned pension savings.

The rules on how you could access your Pensions freedoms changed in 2015. Before this, it was more common to use pension funds to purchase an annuity. This is where you would use your pension fund to buy a fixed and secure income for life from an insurance company. Now, there is much more flexibility, with people able to access their pensions via ‘Drawdown’ which essentially allows you to access the funds however you like. With drawdown, you withdraw money from your pension pot and the remainder stays invested and can go up and down in value. By choosing drawdown, you are giving up future certainty for complete flexibility.

If opting for a secure income from an annuity instead, the amount you receive is based on annuity rates, which depend on a number of factors such as age, health, life expectancy, lifestyle and are also particularly sensitive to interest rate changes. Because of this, current annuity rates are certainly not what they were. Based on a single life annuity for a healthy 65-year-old, they fell by 40% between 2009 and 2020*. While they don’t appear to offer the value for money they used to, for some having the security of guaranteed income is still important.

Choosing the right options are complex, so we've created the table below to summarise the main differences:

It is imperative that all the different advantages and risks are weighed up before you make a decision. The best choice for you will depend on your individual circumstances and attitude to risk, therefore, it may make sense for you to work with a Financial Planner to choose the best outcome for you. Please don’t hesitate to contact us to arrange a complimentary initial meeting to see if we can help.

*Source: https://www.hl.co.uk/news/articles/archive/whats-happened-to-annuity-rates:  Hargreaves Lansdown Annuity index to 26/03/2020