What are your choices at retirement?

When the new pension rules took effect earlier this year, people’s options at retirement changed. No longer were the majority of people essentially forced into purchasing an annuity, and income drawdown was reformed so no one will be restricted by annual income limits.

Annuity or drawdown?

Often, more choice means more confusion, and this is certainly the case with the new rules. Whereas previously many people would have been fairly confident that they would opt for an annuity or income drawdown at retirement, a range of new choices means the decision is more difficult – and extremely important.

Before making a final decision it’s a good idea to seek regulated pensions advice, but the following overview of annuities and  pension drawdown  may help you to understand the basics:

Annuity Income Drawdown
  Income for life, and a decrease in rates will not lower payments   Income can be varied
  Enhanced annuities – available for certain health conditions – provide a higher sum than standard annuities   Fund remains invested so its value could increase
  Index linked annuities help protect your income from inflation   Fund remains yours, so can be passed to beneficiaries and is exempt from inheritance tax
  Some annuities can offer payments to a beneficiary after you die   An annuity can be purchased at any time
  Usually irreversible   Fund value could decrease
  Your income remains the same even if rates increase   Annual allowance drops to £10,000 for income drawdown plans that started after April 2015
  The fund usually remains with your provider on your death if the policy does not have death benefits   It is possible to spend the fund too quickly and not having enough money in retirement

Your retirement plans make the difference

One of the main differences between the two options is that annuities offer security and drawdown offers flexibility. It’s possible to take up to 25% as a tax-free lump sum with both options, and it’s also possible to combine the products. For example, you may decide to take a flexible income for the first few years of retirement and then purchase an annuity for security, or purchase an annuity with enough of your pension fund to cover the regular bills and put the rest into income drawdown.

To make the most appropriate decision it’s important to consider what you want in retirement. For example, flexibility, certain death benefits and the fund to remain part of your estate, or a steady income with low expectation of the amount needing to vary.

Plan ahead

Whichever option you choose at retirement, you will be more likely to have the life you want if you have enough money to fund it. Pensions are a particularly effective way to save because the tax relief – and employer contributions in workplace schemes – increase any contribution you make, giving you a larger fund. Try to plan ahead and work out how much you need to save for retirement, because there can be large differences between what people expect in retirement and what current retirees actually have.

Are you happy with the new pension rules, or have they created more confusion? Tell us with a comment below.

Call 0800 304 7288 for a friendly chat about your pension

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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