When it comes to drawing from private pensions once savers reach 55, most people have two options. Flexible drawdown allows you to dip into your pension pot as and when you require cash, and keep the remaining funds invested. Another option is to buy a fixed-term or lifetime annuity from an insurance company using your pension funds. This provides a regular guaranteed income in retirement.

Historically, annuities were a popular option for many savers, when rates were high. Since 2008/09, however, annuity rates have been very low. Despite recent rises, they still remain low compared to their historical highs. Having done the hard work of the ‘accumulation stage’, it’s vital to choose the right path when it comes to actually utilising your pension savings. Flexi-access drawdown may provide a better option than an annuity for savers.

The case for annuities

The income from an annuity depends on a number of factors, including the size of your pension pot, your health, age, and the policy type. A lifetime annuity provides security, affording the policyholder a guaranteed income for life. However, this option affords less flexibility than drawdown, and annuity rates are currently low, so there is a risk that the total income you receive may be less than the pension savings used to purchase the annuity.

Drawdown vs. annuity

In the example below a retired couple, both aged 65, have £1,000,000 in their pension pots. The couple would get far more for their money via flexi drawdown, in comparison to an annuity, if they were to live until the age of 85 (in line with average life expectancy). Opting for drawdown could allow them to take £55,400 per year as income for the following 20 years (assuming 4% investment returns per year and 3% for inflation) if they passed away at the age of 85, or £34,000 if they lived until 100. Buying a joint-life annuity (assuming the same inflation indexation) would provide guaranteed income of £35,600 per year, regardless of how long the couple live for.

A financial adviser can help you assess income needs and plan properly for retirement. Call 03300 564 446 to speak to a Lumin expert, or book a free introductory meeting by visiting luminwealth.co.uk/contact.