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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