3 Mins
When it comes to retirement planning, two options often considered are lifetime annuities and income drawdown. While both can provide a regular income during retirement, there are some key differences to be aware of.
Annuities
First, let’s start with annuities. An annuity is a financial product that is purchased from an insurance company, and it provides a guaranteed income for the rest of your life. When you purchase an annuity, you choose to receive the income immediately and set up how you want the income to be paid at outset.
Benefits of Annuities
One of the main benefits of annuities is the guaranteed income they provide. This can be especially appealing to those who are risk-averse and want to have a predictable stream of income during retirement. Another benefit is that annuities can potentially provide a higher income for those who are in poor health or have a shorter life expectancy.
Drawback of Annuities
However, there is a drawback to consider with annuities. Once you purchase an annuity, you cannot change your mind and receive your money back. This means that if you need access to the capital value used to purchase the annuity, for any reason, you won’t be able to get it. As such, annuities may not provide as much flexibility as other options, as you are generally locked into a set income for the rest of your life.
Video Series: Guaranteed Income
We’ve partnered with Money Alive to bring you FREE access to their interactive, impartial, educational video journeys covering options for guaranteed income.
Income Drawdown
Now, let’s move on to income drawdown. Income drawdown is an option that allows you to take an income from your pension pot while keeping the remainder invested. This means that you have the flexibility to adjust your income as needed, and the opportunity to potentially grow your pension pot over time.
Benefits of Income Drawdown
One of the main benefits of income drawdown is the flexibility it provides. You have the ability to adjust your income up or down as needed, and you also have the option to take lump sums if needed. This can be especially appealing for those who want the option to have a higher income during the early years of retirement. For example, a higher income than an annuity may be able to provide in the initial years of retirement, but where you anticipate needing less income in later years. This option also offers the ability to leave a larger inheritance for loved ones.
Risk of Income Drawdown
However, it’s important to note that income drawdown does come with risk. Because your pension pot remains invested, there is the potential for its value to fall. This means that the amount of income you are able to take may have to decrease over time if your investments do not perform well. It’s also worth noting therefore that income drawdown may not be suitable for those who are risk-averse or who are looking for a guaranteed income. If you draw income or capital from an income drawdown plan at high levels, you might run out of money.
Video Series: Flexible Income
We’ve partnered with Money Alive to bring you FREE access to their interactive, impartial, educational video journeys covering flexible income.
Let’s sum up
A lifetime annuity can be purchased and you can leave this to run for the rest of your life knowing that your income will be paid. Income drawdown gives you more flexibility over withdrawals, but is more complex and could require ongoing reviews, thereby adding a cost to the flexible option.
At Henderson Loggie Financial Planning, we understand that retirement planning can be overwhelming. That’s why we are here to help you make informed decisions about your retirement options, including annuities and income drawdown. We will work with you to understand your unique circumstances and goals, and we will help you choose the option that is best suited to your needs. Contact us to learn more.