Annuities vs Pension Drawdown: Size Does Matter
Annuities – surely they’re old hat, right?
Since the introduction of the pension freedoms in April 2015, which opened a whole host of flexible ways to access your pension, annuities have seemed less attractive for many. Even before this, rock-bottom interest rates and low yields on government gilts had depressed the annuity rates providers were willing to offer.
When pension drawdown was flung open to the wider market – which sees you take flexible income and lump sum payments from your pension pot – it seemed like another nail in the coffin for annuities.
How much is your pension worth?
However, given the average UK pension pot is worth £50,000 according to research from Aegon, could an annuity be a better option for a pot of this size?
Thanks to a new tool from Drewberry – an Annuity Rates Calculator – it’s possible to compare the outcome for an annuity and pension drawdown side by side.
A £50,000 pension buys a 65-year-old non-smoker from Brighton a guaranteed income of £2,637.72 per year for the rest of their life. If you plug this figure into another Drewberry tool, a Pension Drawdown Calculator, this would see your income run out at 88 assuming 2% inflation and consistent 4% growth.
This is dangerously close to the life expectancy of a 65-year-old man (86) and less than the life expectancy of a woman of the same age (89).
With life expectancy rising all the time – just ask Buckingham Palace, where they’re inundated with requests to congratulate centenarians – this is a big gamble for a small pension pot. Women are especially at risk. Longer life expectancies mean they’re even more likely to outlive their retirement savings, potentially making an annuity all the more suitable for female retirees.
Also, this assumes consistent 4% growth each year. Advisers such as Drewberry will typically undertake cash flow models to replicate real market conditions, which can include the impact of market shocks.
What about inflation?
If you opt to index-link your annuity so it keeps pace with inflation, the amount you’ll receive initially falls. Here the sums are murkier when it comes to whether an annuity is better than drawdown or vice versa – replicating a lower index-linked annuity with drawdown obviously stretches your pot out for longer.
Is freedom worth the risk?
Still, for people with small pots, it might be better to pick the guarantee offered by an annuity rather than risk running out of income in their old age.
Although income drawdown and the pension freedoms offer more in the way of flexibility, letting you decide how and when you take your retirement income, you’ve got to weigh up the pros and cons of your retirement options before deciding.
Ultimately, deciding between income drawdown and an annuity is a conversation between you and your adviser. However, when you’ve got a smaller pension pot, income drawdown may not always be worth the risk.
Written by: Head of Pension Planning, Neil Adams
The contents of this article are for reference purposes only and do not constitute financial or legal advice. Independent financial or legal advice should be sought in relation to any specific matter. Articles are published by us without any knowledge or notice of the circumstances in which you or anyone else may use or rely on articles or any copy of the information, guidance or documents obtained from articles. We operate and publish articles without undertaking or accepting any duty of care or responsibility for articles or their contents, services or facilities. You undertake to rely on them entirely at your own risk, and without recourse to us. No assurance of the quality of articles is given or undertaken (whether as to the accuracy, completeness, fitness for any purpose, conformance to any description or sample, or otherwise), or as to the timeliness of the publication.
Latest posts by Silversurfer's Editor (see all)
- The Silent Disease… Prevention and You - November 21, 2017
- 10 tips to make perfect sausage rolls at home - November 16, 2017
- Are you offended by the Greggs Christmas Advert? - November 16, 2017
- Gino D’Acampo’s Mamma Alba’s meatballs - November 16, 2017
- Win ONE of TEN 2018 Dairy Diaries and fabulous cookbook sets! - November 16, 2017
Leave a Comment!
Community Terms & Conditions
These content standards apply to any and all material which you contribute to our site (contributions), and to any interactive services associated with it.
You must comply with the spirit of the following standards as well as the letter. The standards apply to each part of any contribution as well as to its whole.
be accurate (where they state facts); be genuinely held (where they state opinions); and comply with applicable law in the UK and in any country from which they are posted.
Contributions must not:
contain any material which is defamatory of any person; or contain any material which is obscene, offensive, hateful or inflammatory; or promote sexually explicit material; or promote violence; promote discrimination based on race, sex, religion, nationality, disability, sexual orientation or age; or infringe any copyright, database right or trade mark of any other person; or be likely to deceive any person; or be made in breach of any legal duty owed to a third party, such as a contractual duty or a duty of confidence; or promote any illegal activity; or be threatening, abuse or invade another’s privacy, or cause annoyance, inconvenience or needless anxiety; or be likely to harass, upset, embarrass, alarm or annoy any other person; or be used to impersonate any person, or to misrepresent your identity or affiliation with any person; or give the impression that they emanate from us, if this is not the case; or advocate, promote or assist any unlawful act such as (by way of example only) copyright infringement or computer misuse.
Nurturing a safe environment
Our Silversurfers community is designed to foster friendships, based on trust, honesty, integrity and loyalty and is underpinned by these values.
We don't tolerate swearing, and reserve the right to remove any posts which we feel may offend others... let's keep it friendly!