Martin Lewis compares pension annuity against drawdown
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Many pensioners will be looking to secure an annuity, which offers guaranteed income for life, when they come to retire. However, an expert has suggested certain individuals will get more money in particular circumstances.
Jonathan Watts-Lay, Director at WEALTH at work, explained how this may be the case.
He said: “People will need to understand that the amount of income received will be based on individual circumstances, including their age, health, lifestyle choices and where they live.
“Other factors, such as the size of the pension pot used to buy the annuity, the options selected and the annuity rates available when the annuity is purchased will also influence the income payable.”
The expert highlighted there are a number of variations of the type of annuities which can be offered.
They depend on several factors, including the lifestyle choices people make, and whether they have any underlying conditions.
He said: “This can include an enhanced annuity which pays a higher income if aspects of an individual’s lifestyle may shorten life expectancy such as smoking, drinking alcohol or their medical history.
“There is also an impaired life annuity which pays a higher income than a standard annuity for those who have significantly lower life expectancy due to an existing medical condition.”
Annuities were previously the go-to option for people and their income in retirement.
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However, they have fallen out of favour in recent years, in favour of a drawdown option which allows Britons to keep their pension invested.
While the option is slightly more risky as people ride the peaks and troughs of the market, it does provide the opportunity for individuals to secure pension growth.
The popularity of drawdown has also been compounded by low annuity rates, which did not endear the option to retirees.
However, annuity rates are back on the up and up – and as a result, more people may be drawn to this option.
Mr Watts-Lay continued: “This could be particularly true for those concerned about the impact of the cost of living crisis.
“An annuity provides a guaranteed income, and can be indexed linked to ensure inflation does not eat away at it.
“It’s important that people understand all of their income options at retirement and which might be the best for them, in order to be able to make an informed choice; whether that be an annuity or other options like income drawdown, cash withdrawal or a combination of options.
“As individual circumstances change, it may not even be as straightforward as picking only one option and a pick and mix approach may be best.
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“For example, for those who want the security of an annuity whilst still wanting some flexibility, they may want to consider using some of their pension savings to purchase an annuity that meets their core needs, while keeping the remainder invested to do with what they wish.”
Annuities also come with various other considerations which are vital to take into account before this option is selected.
Britons should be aware that once an annuity is purchased, generally it cannot be changed.
This means people are stuck with it for life, and there is typically no option to change one’s mind and receive their pension pot back in the future.
For this reason, Mr Watts-Lay stated it is paramount for retirees to shop around for annuities, as rates and benefits can substantially vary.
Some may wish to seek independent financial advice or conduct their own research on the matter.
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