Some decisions you make in life are fairly minor (think: choosing a film to watch). Others are important – like deciding how to take your pension savings. So we’re here to help you better understand two different retirement options: drawdown and annuities.
How do they work?
Drawdown: Drawdown, or a ‘flexible income’, lets you take money from your pension pot as and when you want to. You decide how much you take, and any money left in your pot stays invested. Your income isn’t guaranteed, as the value of investments can go down as well as up. Depending on how much you take out and investment performance, there is a risk you could run out of money.
Annuities: An annuity is something you can buy with some or all of your pension pot. It can give you a guaranteed income for the rest of your life. Once you’ve bought an annuity, you probably won’t be able to change the amount you get or when you get your payments.
Remember: It’s possible to buy an annuity with some of your pension savings and keep the rest in drawdown – it’s not a one-or-the-other situation. This could give you peace of mind that some of your income is guaranteed while also letting you have some flexibility.
Not every retirement option will be available with every provider. So, for example, if drawdown is the option you want to go for, do check that this is something your plan and provider offers.
How much money can you get?
Drawdown: With drawdown, how much money you get mostly depends on the amount you have in your pension pot.
Annuities: How much income an annuity provider gives you depends on different things, including:
- How much you’re using to buy your annuity – the more you pay, the more you can get
- The ‘annuity rate’ – the higher the annuity rate is when you buy, the more you can get
- Your age – the older you are, the more you can get
- Your health and lifestyle – certain health conditions or lifestyle factors (like having high blood pressure, how much alcohol you drink, and how much you smoke) might get you more income
- Features you’ve added on – you can tailor annuities so they rise over time or with inflation (‘escalating’ annuities), or provide for your beneficiaries on your death
The amount of income you can get varies from provider to provider, so it’s always worth shopping around to try to get the best income for your needs. Each provider will view your health and lifestyle information differently and may offer a different level of income as a result.
Remember: If you’re considering a combination of drawdown and an annuity, you may want to get thinking about how you’ll allocate your money. Will you use your annuity income to pay for essentials, like utilities? Would you take money out of your pot via drawdown when you’re looking to cover things like holidays?
When can you start getting your money?
Drawdown: You can take money from most plans from the age of 55 (rising to 57 from 6 April 2028). People are generally living longer nowadays, so it’s important not to take out too much money too soon as you could end up running out.
Annuities: You can buy an annuity from age 55 (57 from 6 April 2028). The amount you can get from an annuity goes up with age, so some people might wait until later in their retirement to buy one. They might opt for drawdown when they first retire, then buy an annuity in future.
Remember: It’s possible to buy annuities in stages. You could buy an annuity with some of your pot, wait a few years, then do it again. Since you’ll be older, you’ll probably get more money – although keep in mind annuity rates in the market can change and could be lower at that point.
Do you pay tax?
Drawdown: You can normally take 25% of your pension pot tax-free. The remaining 75% can be subject to income tax when you take it.
Annuities: Before you buy an annuity, you’ll normally be able to take 25% of your pot tax-free. Your annuity income will usually be subject to income tax.
Remember: You can read our article to find out how tax works on pension savings. Your own personal circumstances, including where you live in the UK, will have an impact on the tax you pay. Laws and tax rules may change in the future.
Can you pass your money on to your loved ones when you die?
Drawdown: If you’ve gone for drawdown, your beneficiaries can take what’s left in your pot as a lump sum. They could use that to buy an annuity of their own. In some cases, they too might be able to take the money through drawdown.
Annuities: There are features you can add on to an annuity so it provides for your loved ones after you die:
- Spouse or dependants’ income – you can opt for a loved one to get up to 100% of your annuity payments when you die
- Value protection – you can protect up to 100% the amount you bought your annuity for so that when you die, a lump sum will be paid to your beneficiaries, minus what’s already been paid to you
- Guarantee period – if you die within a period you’ve chosen (for example, 10 years), your annuity payments will continue to be made to your beneficiaries for the remainder of that period
As we’ve mentioned, you could also opt for an escalating annuity so your income can rise by a percentage each year, rather than being a fixed amount. But don’t forget, add-ons impact the amount of income you get. The more features you add, the lower your annuity income payments might be.
Remember: It’s important to keep your beneficiary information up to date on your pension plans.
Be sure to research and shop around before deciding how to take your money. Pension Wise, a service from MoneyHelper, offers free impartial guidance to over-50s about their options.
It may be worth speaking to a financial adviser. If you don’t have one, you can find one at Unbiased. You can check if an adviser has been authorised by the Financial Conduct Authority (FCA) on FCA.org.uk.
The information here is based on our understanding in January 2024 and shouldn’t be taken as financial advice.
A pension is an investment and its value can go down as well as up and may be worth less than was paid in.
Standard Life accepts no responsibility for information in external websites. These are provided for general information.