What to do with Pension Freedom – cash-in, drawdown or annuity?

From April 2015, those over 55 will be allowed to take as much money from their pension pot as they like, when they like, until the money runs out, dependent on the rules governing their individual pension scheme.

This includes taking the whole lot as a single lump sum. Short of being in debt so much that cashing in our whole pension pot is a dire and absolute necessity, most of us would not choose to undo our pension pots, unless our imminent death has been forecast. In fact, most of us can expect to live for an increasing length of time after retiring and, requiring income to fund our lifestyles, are likely to consider drawdown or an annuity. So, what exactly are our options in both camps?

Drawdown

• Income drawdown means that your pension fund remains invested and you draw an income directly from your pension pot. It is important to manage the investments and the amount of income you take if you plan to use income drawdown for your income for life.
• Until April 2015 there are limits on the amount of income that can be taken annually.
• Taking large sums in one go needs to be thought about very carefully as only the first 25% of your pension pot can be taken tax-free, with the rest taxed as income, at your highest marginal rate.
• You have the flexibility to vary your income when it suits you and you still own your pension pot which means that it can be passed on as part of your estate on your death.
• Your remaining pension pot will rise and fall with the performance of the investments made. There is a risk of you running out of money if you take too much income relative to the growth of the investments made.
• It’s important to remember that the more you withdraw in the beginning of your retirement, the less you will have available to fund your retirement in the future.

Annuities

• For some people annuities will still be the best option, providing you a guaranteed income for life.
• When you purchase an annuity you sell your pension pot to an insurance company in return for the promise of an income. You can buy an annuity for a fixed period or for life.
• The amount of income you will receive, whether it grows (and at what rate), whether your spouse receives an income on your death etc, are all conditions set on the date you purchase your annuity. You cannot change your mind after the cooling-off period once you have purchased your annuity, even if your circumstances and needs change drastically.
• The amount of income you can expect to receive is dependent on many things including current annuity rates, the size of your fund, your age, your health and the options you choose.
• Where your health has been affected – for example diabetes, heart conditions or even if you smoke – the chances are you will qualify for an enhanced annuity. An enhanced annuity could increase your annuity income by up to 60% based on Dec 2014 open market figures.
• From April 2015, people holding joint annuity policies, or those with a guaranteed term, will be able to pass them on to a beneficiary tax-free if they die before the age of 75.