Annuities vs. Drawdown – The battle of the pensions

As announced in last year’s Budget, from 6th April 2015, those approaching retirement will have much greater choice with regards to how to take their pension, including the ability to fully cash in their pension altogether. For many however, the choice will result in continuing to buy an annuity to secure a guaranteed income for life; while for others, the flexibility of drawdown will appeal.

David Smith, Financial Planning Director at Tilney Bestinvest, compares fixed annuities versus drawdown.

Flexibility in income

“Perhaps the most obvious difference between a fixed annuity and drawdown is in regards to flexibility. With a fixed annuity, current rules mean once the arrangement has been set up, the income is guaranteed and cannot be altered. With flexible drawdown however, there are no restrictions on income (provided there is available money in the pot) and this can be altered at any time. From April 2015, retirees will also be able to access all of their pension pot as a lump sum if they choose.”

Tax considerations

“With both annuities and drawdown, up to 25% of the plan’s value can normally be paid tax free. With an annuity, the ‘guaranteed income’ (annuity) is treated like income and is subject to income tax if the person’s total income exceeds the recipients Personal Allowance. Pension income is not however subject to National Insurance.

“In drawdown, income taken from the fund is treated the same as annuity income. Those looking to go into drawdown should therefore consider whether accessing a large percentage of their pensions (or indeed taking their entire pension as a lump sum) could push them into a higher tax bracket. Even relatively small pension pots could therefore, at least in part, be subject to higher income tax rates.”

Security and Risks

“With an annuity, a retiree’s income is guaranteed for life and is not affected by market performance as it is no longer invested. In drawdown however, the money can only be taken for as long as the fund lasts. Therefore, the risk is that you could empty your pension pot sooner than you wish.

“It is important to consider however that the decision to buy an annuity requires close consideration since under current rules once it is purchased it cannot be altered – though that may be about to change with this week’s Budget. With drawdown, retirees can change their income needs (dependent on available funds). Some may even decide to purchase an annuity further into their retirement.”

Opportunity for Growth

“Just as some may be reassured by the certainty of an annuity, which guarantees a set income in retirement, for others the attraction of the opportunity to continue to grow their income during retirement, will be attractive. With drawdown, as the funds in the account are still invested, the opportunity for them to rise (or conversely fall) continues beyond a person’s retirement date.

In addition, unless the retiree dies during a Guarantee period (an option it is sometimes possible to take) or has incorporated an entitlement to a spouses pension, with a fixed annuity any remaining funds are not available to be passed on post death. With drawdown, after tax, the funds remaining in the pension pot can be passed on.”

David Smith concluded: “Statistics from the Association of British Insurers* demonstrate that the changes announced in last year’s Budget have already had a real impact on those approaching retirement; with sales of annuities falling by over a third between the first and second quarter of 2014.

“Given the increased choice from 6th April, it is more important than ever that those approaching retirement consider their individual circumstances before making any decisions on their pensions: it is one of the most, if not the most important financial decisions of an individual’s financial life. While there is no hard and fast rule of thumb, for many people the combination of both an annuity and Flexible Drawdown might be the right choice.”

David Smith can be contacted on 0191 269 9970 david.smith@tilneybestinvest.co.uk

Tilney Bestinvest has launched a new At Retirement service for those approaching retirement; this comprises the offer of a free consultation with a financial planner for those in need of advice, a powerful tool to help those savers who want a guaranteed income for life (annuity) but who feel they do not need advice shop around for a better deal, as well as competitive new drawdown pricing for the award-winning, low-cost Best SIPP.

More information can be found at: www.bestinvest.co.uk/your-options-at-retirement

*ABI Statistics Q2 2014

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Important Information:

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This press release does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you then a SIPP might not be right for you. Self-directed investors should regularly review their SIPP portfolio, or seek professional advice, to ensure that the underlying investments remain in line with their pension objectives.

The ‘At Retirement’ service is a restricted service and not a whole of market solution. You may be able to find a better rate by looking elsewhere or contacting providers directly. Just Retirement Solutions will use your information to provide the annuity comparison service to you for the purpose of obtaining quotes from annuity providers. Once set up, an annuity cannot normally be changed or cancelled. Therefore it is important to consider all of your options, especially in light of the new pension reforms. If you are unsure of your options you should seek professional financial advice or visit Pensionwise.gov.uk.

Press contacts:

Roisin Hynes
0207 189 2403
07966 843 699
roisin.hynes@tilneybestinvest.co.uk

Matthew Gray
0207 189 2492
matthew.gray@tilneybestinvest.co.uk

About Tilney Bestinvest

Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including UK Wealth Manager of the Year, Low-cost SIPP Provider of the Year and Self-select ISA Provider of the Year 2013, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Bestinvest employs almost 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.

The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.

For further information, please visit: www.tilney.co.uk