Pension Annuity v Flexible Drawdown 2015
Published / Last Updated on 26/11/2014
Video compares buying an annuity with your pension against the new pension flexible drawdown rules April 2015. Low risk or high risk? Think about your retirement options.
Transcript:
“Hello again, wooo! Pensions, pensions, pensions, so much news going on with pensions and annuity rates are low and they’ve been low for some time and we’ve got the new flexible drawdown pension rules starting in April 2015.
At the time shooting this video it is November 2014 and there's a lot of PR coverage and journalists and television and everybody else all saying “brilliant, we now have access, we can draw our funds down whenever we want, we can go buy a Ferrari, we can do whatever, we can have a Lamborghini, we can spend it on holidays.”
My view is most of you out there, most of the general public will take a little bit more [of a] sensible approach in terms of their retirement funds. Yes, if they’re small funds then you may look at this flexible retirement and see it as an opportunity to draw funds down.
However, I just wanted to highlight in this video a comparison of drawdown versus annuity.
So with the annuity, what a pension annuity is, is the day that you’re due to retire: yes, you can have your lump sum out, tax-free lump sum if you’re still resident in the United Kingdom, may be taxable if you live overseas, but if you drawdown your lump sum the balance of your pension fund that is then invested with an insurance company and they pay you a guaranteed income for the rest of your life, if it's a fairly typical, standard annuity.
There are, sort of, different types of annuity where there’s some investment linked annuities, others may be where there are protected capital sums and things like that.
But for the purposes of the video today, let’s just assume it is a standard annuity or an impaired life, enhanced annuity where your income is being guaranteed for life.
The issues with annuities have generally been: “well if I don't buy a bolt on with my annuity” and I liken it to when you buy a car: when you buy a car if you want metallic paint or if you want power steering or if you want alloy wheels or if you want the ‘whizbang’ radio in there, if you want it to be turbocharged it's more expensive and that's the same with annuities.
With an annuity, your base annuity is the cheapest and therefore, it gives you the most starting income but if you want an increasing income, in line with inflation, or a fixed increase every year, a fixed pay rise, then the starting point of your annuity is lower, its more expensive.
If you want a build in a guaranteed period for your annuity it becomes more expensive. If you wish to build in a spouse's benefit so on the day that you die you have a spouse's pension built into your annuity, so your spouse or civil partner can continue receiving an income. All of thatt becomes more expensive and a lot of people have turned against annuities because of these things, because annuity rates are low, because it costs more to put bolt-on's onto your pension scheme onto your annuity and people are steering towards drawdown because of this new found flexibility. [Because] if you have a single life annuity, so it's just on your own life then the day you die, the annuity fund is gone.
With drawdown, with drawdown you have the flexibility to control your income, drawdown as much or as little as you want. You can still have your tax-free lump sum but you can control how much income you have and with the new death benefit rules there are advantages where you can leave your pension fund to loved ones.
You could previously leave it to your spouse with a tax charge but now they've opened that flexibility up where you can leave it to your spouse, to your loved ones and potentially does no tax charge. They potentially can inherit your pension fund tax free, that's usually if you are below the age of 75.
All of a sudden “woo” the drawdown, flexible pensions drawdown, seems very attractive doesn't it? And all I wanted to do with this is just highlight the risks.
An annuity is a guaranteed income for life and if you had a spouse's benefit, it's a guaranteed income then to pass on to your spouse for his or her life.
Drawdown, it's still invested, your pension fund can rise as well as for in value. Now, what he if we suffer a stock market crash? The likes of what we saw when we go back to the credit crunch back in 2008 and 2009, where globally stock markets nearly halved in value, the FTSE 100 index did halve in value.
Hmm, imagine that was your drawdown pension fund and all of a sudden it was worth this and it’s halved in value which then cuts your income?
So I'm just highlighting here: do not ignore annuities. If you are a cautious person or if you don't have any other form of income to fall back on you should really consider annuity first as the low-risk option to give you a guaranteed income for life. If you are more proactive with your investments and your pensions, if you understand investment risk or indeed if you're working with a financial adviser like ourselves, then do consider drawdown. But just remember one is quite cautious the other one does carry on with a degree of risk.
So that’s annuities, pension annuities versus drawdown as a risk profile comparison. As ever with your retirement, at retirement decisions, these decisions affect the rest of your life so my suggestion is get advice before you make any decisions. And on that, as I brush my surf bum hair out of the way, I will leave you in peace to enjoy the rest of your day, morning, evening, afternoon whatever time is when you’re watching this. Thanks very much for watching.”
