Income Drawdown vs Annuities for Retirement
Income Drawdown vs Annuities for Retirement
Finally, you’ve made the decision to retire. But you’re faced with a decision – do you buy an annuity, or do you leave your pension intact and receive income from it through income drawdown?
The decision can be tough, but we’re here to give you the facts to make things easier. In this article from the team here at Hansford Bell, we’ll explain what annuity and income drawdown are, their differences, rates, and determine which is the best option for retirement.
Get in touch to discover the right retirement and finance options for you with advice from our experts.
Differences between Annuity and Income Drawdown
So, the first thing to pin down is the definition of both annuity and income drawdown. This lets you see how each option works, making it easier to tell the difference between them and eventually making it easier to make your final decision.
What is an Annuity?
An annuity is a service sold by an insurance company that pays income for an agreed upon amount of time – either for life, or a set number of years. Income from an annuity is taxed as earnings, but when you take out an annuity you can withdraw up to 25% of your pension pot tax-free.
What is Income Drawdown?
Income drawdown is a method of obtaining income from your pension once you retire, without using it all to buy an annuity. This keeps your money invested in the pension fund, allowing it to continue to grow. The value of your pension can increase over time through this method but be careful as gains are not guaranteed and the value can always go down.
What’s the Difference?
The main difference between income drawdown and annuity is the variability in your rate of income.
An annuity is typically an agreement that gives you a fixed rate of income over an amount of time that you’ve specified, while the rate of income from income drawdown is variable depending on how well your investments do.
An annuity also gives you up to a quarter of your funds in untaxed cash when you purchase it, making it a way to get a decent amount of your pension pot right away.
Whichever decision you choose, make sure to consider the current annuity rates and the expected changes in your investments. This will put you in the best position to ensure a relaxing retirement with a comfortable financial situation.
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How Much Can I Receive from My Annuity?
The exact rate for income from an annuity depends on the age at which you purchase the annuity, how much money is in your pension pot, and the type of annuity you are taking out. The older you are when you purchase your annuity, the greater the annual income you may receive from it.
Current annuity rates in 2023 are at a level comparable to annuity rates between 2005 and 2008, which were the highest rates during the last two decades. This makes the current annuity rates an appealing concept when compared to the values of years before 2022.
This rise in annuity rates was brought about by a rise in interest rates, bringing a positive impact on the value of income from an annuity.
The Different Types of Annuity
The classification of the annuity you take out can determine how much income you receive from your pension, along with conditions on when it may stop. Some of the key types of annuities are:
- Single Life Annuity. This pays you an income for the rest of your life, stopping when you pass away.
- Joint Life Annuity. Similar to the single life annuity, this pays an income for the rest of your life. It passes on to your beneficiary, typically your spouse or partner, if you pass away before they do.
- Level Annuity. This pays a fixed rate of income each year.
- Escalating Annuity. The income from an escalating annuity increases each year by a specified percentage – 3%, 5%, or other options as available.
Contact us today to determine the annuity that’s right for you and begin creating a retirement plan that’ll fund the lifestyle you want.
Is Annuity or Income Drawdown the Best Option for Retirement?
So, which one is actually best for your retirement. Well, as with many financial concepts, deciding whether annuity or income drawdown is the best option for retirement depends heavily on your own personal financial situation and goals for retirement.
On the one hand an annuity offers a large portion of your pension fund as tax-free cash alongside its regular payments, giving you extra incentive to choosing this form of income.
On the other, it can be preferable to leave your money in your pension pot to allow it to continue to grow based on your investments.
Each of these options comes with their own advantages and disadvantages, and the actual answer can depend on what you want to achieve with your pension. Getting in touch with a financial life advisor can help you to make the decision that’s right for you, supporting you with your life goals and retirement plan.
Financial Planning for Easier Retirement from Hansford Bell
Determining the right choice between an annuity and income drawdown can seem daunting, but fret not – we’re here to help.
The journey to a relaxing retirement begins by getting in touch with our team of chartered financial planners. We’ll give you advice on the options available to you, enabling a seamless transition to the next phase of your life.
Check out our retirement financial services to see the ways in which we can help keep your golden years carefree and comfortable. Otherwise feel free to read on with some related articles.
Find out how to retire if you’re self-employed by reading our article >
This article is for informational purposes only and does not constitute advice.
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