Should I Buy an Annuity or Go Into Drawdown?

If your retirement is just around the corner, you’ve most likely looked at what you’re able to do with your pension pot and you’ve mostly come across these two options which we will be discussing today, these are annuity and drawdown. With the options presented to you, do you know what they are and which option would be the best option for you?

Guaranteed and Flexible Retirement Income

We think these two terms are more helpful than annuity and drawdown. 

An annuity is a guaranteed income. This means no matter how long you live, even after your life expectancy, you will still get paid this money. Other types of guaranteed income are final salary pension and the state pension. This means that annuity is a guaranteed income that you buy by taking your pension pot to purchase an annuity. If you’re not a fan of uncertainty, this option would be the best for you because you will know for sure how much you will be getting.

Pension drawdown is an example of flexible income. You’re free to use this however you desire throughout your retirement. You can either take it as a regular income or in chunks, the choice is all yours. This is the same concept as your savings accounts and ISAs. The great thing about this is the flexibility for you to be able to have any amount of funds at your disposal.

Which option is right for you

The majority of the people would opt for drawdown and there are two reasons for this.

Firstly, It’s great to have a big pot of money because when in your life have you had a six-figure sum to spend?

Secondly, given the low price of an annuity, giving you around £4,000 per year for every £100,000 you have, which sounds absolutely brilliant if we may say so ourselves.

However, one of the reasons you won’t get a lot of money with an annuity is because you might live a very long time, your retirement could easily be 30+ years, so it is important to think about how much money you will need in your retirement, especially your essential expenditures. If you’re able to cover these with the guaranteed income, then you can think about whether you want more flexibility with the rest of your pot.

Even though it would be wonderful to have a large sum of money to spend, keep it in mind that this will have to last you for at least 30 years, so invest wisely!