Should I take my pension as an annuity or choose income drawdown?

25 June 2015

Q

I am 63, retired and have been receiving the state pension since November 2014. I am mortgage-free and considering options for taking a pension from funds held in AJ Bell Investcentre and Fidelity. I have no dependants so what would be my best option: annuity or income drawdown?
From
JW/Eastbourne

A

The new pension freedoms, introduced in April, have given many people far greater choice over how they access their pensions.

However, with more choice comes more complexity and there is a far greater risk that people will make the wrong decisions.

The risks of getting it wrong are increased if people aren't taking independent financial advice, and it is concerning that many are being encouraged to make their own decisions when the ramifications of getting it wrong could be huge.

The right choice for you will depend on your circumstances, objectives and your attitude to risk. The starting point is don't try to be too clever. Just because you have more choices it doesn't mean you have to use them.

I am a big supporter of people having secure income to meet, at least, their basic living costs.This secure income is likely to come from a mix of the state pension, final salary pensions and buying an annuity with part, or all, of their pension fund. By having this secure income in place it means that somebody's basic standard of living is protected.

Beyond this, it could be sensible to leave money you don't need now in your pension. Here, it will benefit from tax-efficient growth, you can leave it to whoever you want on your death and you can still access the money whenever you need to. If you wish, you can also draw an income from the money in your pension.

New pension freedoms: the three main options

1. Cash in your pension - only the first 25% is paid tax-free; you need to pay tax at your highest rate of tax on the rest as and when you take it.
2. Income drawdown - your money stays invested but you are able to take a regular income or receive lump sums.
3. Buy an annuity - in return for a lump sum from your pension (be it all or some of your fund), insurance companies pay you a guaranteed income for life.

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