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Annuities Pension Drawdown Fixed Term Plans

Read this before considering an annuity or pension drawdown

Don’t invest in an annuity or drawdown without reading this article first

As a qualified financial adviser, and someone who specialises in annuities and drawdown, I worry that many people are not getting proper advice before they purchase an annuity or invest in pension drawdown and therefore are in danger of making the wrong decisions which could seriously affect the amount of income they get for the rest of their lives.

Annuity or Drawdown? - that is the question

When you want to take regular income payments from your pension pot you must eithire purchase an annuity or investment in a pension drawdown plan.

Annuity = Guaranteed income for life no matter how long you (or your partner) live
Drawdown = Flexible income options, investment control and money can be left to family

Deciding whether to take income by way of an annuity or drawdown is one of the hardest questions in personal finance.

An annuity is a serious business

When Jane Austen wrote “An annuity is a very serious business” in Sense and Sensibility in 1810 she didn't know how that 200 years later annuities would be an even more serious business.

Annuities are serious 
 
  • They are the only policy that guarantees income for life no matter how long you live
  • Annuities give you peace of mind and security

But

  • You must get it right at the outset becuase you can't change your mind later
  • The alternatives (e.g. drawdown) are not always better

The other options such as Fixed Term Income Plans and Pension Drawdown are equally as serious and a financial adviser will advise you about all the different options.

Drawdown is flexible but can be complex and risky

If you want to take cash and income from your pension pot but don’t want to purchase an annuity, you will be investing in a type of pension drawdown plan.

Drawdown is very simple to understand (more about drawdown) but it can be a complex and risky for the following reasons:

Drawdown is flexible but can be risky
  • Income flexibility - you can take as much (or little) income as you like when you want
  • Investment control - you or your adviser can decide where to invest your pension pot
  • Any unused drawdown pot can be left to your family

But

  • If you make poor investment decisions the value of your pension pot will fall in value and if you take out too much income you may run out of money
  • Instead of the peace of mind and security you might have a roller-coaster ride

It is not easy so you need serious advice

If you want to purchase an annuity there are three ways you can do this:

  • By getting financial advice from an adviser
  • Buying it from a website or non-advice broker
  • By going direct to an insurance company

As a qualified adviser I would say you should always get financial advice because there are important differences between arranging your annuity with advice and buying an annuity via a website or from an non-advice broker.

Financial Adviser Non-Advice Broker
Can advice you which option is most suitable for your circumstances  Can only give you information - they cannot give you financial advice
Will give you advice on all the relevant options - e.g. annuities and drawdown Cannot give you advice on all options and information and some brokers do not sell drawdown
Both should get you the same annuity income because all annuity providers the same rates to advisers and brokers. Both will take your health into account
Advisers give "two handed advice" - i.e. unbiased advice on all options Brokers are generally "one handed" - i.e. are biased towards the policy they are selling
Will agree a fee which can be paid out of pension pot Will get paid a commission from your annuity

If you think I am making it up when I talk about "two handed advice", please read my article Beware the one-handed broker or read my guide ‘Retirement Advice - an art or science?’ to find out more. This guide was written for financial advisers but you can read it as well.

Top Tip

More to Annuities

Before you purchase an annuity you should make sure you:

  • Understand all the key issues?
  • Follow the 3 Golden Rules of annuities?
  • You will get the best possible deal

More to Drawdown

Before you invest in a drawdown plan you should make sure you:

  • Understand all the key issues?
  • Follow the Invest your drawdown pot correctly
  • You select a competitive drawdown plan

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This website is run by William Burrows and publishes generic information on annuities, drawdown and other related retirement income matters. Any information you use is at your own risk and does not constitute financial advice.

If you require financial advice you will be advised by Better Retirement where William Burrows is authorised to give investment advice. Better Retirement Group Ltd is authorised and regulated by the Financial Conduct Authority, reference number 153420.