Should I put my pension into an annuity or elsewhere?

16 April 2013


I'm 63 and retired. I have an annuity, but I also have a small pension fund from a previous employer of £40,000, currently with Clerical Medical. I believe I can take 25% of this tax-free. Do I have to take out an annuity with the remainder, or can it be invested with the same company or somewhere else - in a stocks and shares ISA, for example - until annuity rates improve?


You can take tax-free cash equal to 25% of each pension fund. This is provided as a lump sum payment directly into your nominated bank account. The capital can then be used as you wish, for example, for further investment through a stocks and shares ISA.

The remaining capital held in each pension would traditionally be used to buy an annuity. In doing so, you exchange your fund for a guaranteed income, paid for the rest of your life.

Pension rules, however, permit the alternative option of remaining invested through a drawdown pension. This provides greater flexibility in that income can be varied between zero and an upper limit, which is normally more than the equivalent amount provided through a single-life annuity.


Drawdown, however, is only appropriate for someone prepared to accept a high degree of investment risk, as the fund is not guaranteed and could vary in value, falling as well as rising, at any time. Also the charges involved are significantly higher than annuity fees and are normally only cost-effective when the pension fund's value is at least £75,000.

Given the value of your existing pensions, I feel drawdown is not a viable option. My advice would be to seek the annuity on the open market with the most competitive terms.