Annuities and Drawdown

There are essentially only two types of products available to convert your pension pot into an income – Annuities and Drawdown. There are different kinds of both however, so you should understand the differences and how they might affect you.

Older couple talking with Financial Adviser

Guaranteed Annuity

This provides a guaranteed income for the rest of your life. It has a range of options, it can remain level of increasing it can provide an income for your spouse in the event of death can have valuable guarantee period’s and be greatly enhanced depending upon any medical conditions. It can be paid monthly, quarterly or annually and still remains the most suitable product for many people

You do not have to take the annuity on the company with which you have built your pension and should shop around for the best annuity rate, this is called the open market option and everyone is entitled to use it.

Investment Linked Annuity

An investment linked annuity is similar to a normal annuity in that it pays an income for life, but instead of paying a guaranteed income, it will depend on the performance of the underlying investment fund, thereby providing a potential for future income growth.

Fixed Term Annuity

The fixed term annuity is easy to understand because she simply choose the level of initial income up to the maximum allowed and then select a term, usually five or 10 years. At the end of your selected term, the maturity value is paid and reinvested into another pension income product of your choice usually a normal annuity, another fixed term plan or a pension drawdown.

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Flexi Access Drawdown

You can choose to take up to 25% (a quarter) of your pension pot as a tax-free lump sum. You then move the rest into one or more funds that allow you to take a taxable income at times to suit you. Most people will use it to take a regular income.

You choose funds to invest in that match your income objectives and attitude to risk and set the income you want. The income you receive may be adjusted periodically depending on the performance of your investments.

Once you’ve taken your tax-free lump sum you can start taking the income right away or wait until a later date.

You can also move your pension pot gradually into income drawdown. You can take up to a quarter of each amount you move from your pot tax-free and place the rest into income drawdown.