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Deciding how to access your pension is one of the most important decisions in retirement planning. With options like annuities and drawdown, each offering different benefits and risks, retirees need to understand which approach aligns with their financial goals, lifestyle, and risk tolerance.
In Episode 10 of the Retire Well with Wealth of Advice podcast, Chartered Financial Planners Joe and Matthew discuss case studies and key considerations to help guide your decision
An annuity is a financial product purchased with your pension pot to provide a guaranteed income, usually for life. Annuity payments can be:
• Single life or joint life: Income ceases on death or continues to a spouse/partner.
• Guaranteed periods: Ensures payments for a minimum term even if you pass away early.
• Inflation-linked or fixed: Adjusts for inflation or remains level.
Annuities provide security and certainty, especially for those with limited guaranteed income or who are risk-averse.
Drawdown, or flexi-access drawdown, allows your pension to remain invested while you take income. Key features include:
• Flexibility: Withdraw what you need, when you need it.
• Tax-free cash: Usually 25% of your crystallised pension.
• Growth potential: Remaining funds can continue to invest for growth.
• Inheritance benefits: Remaining funds can pass to beneficiaries.
Drawdown carries investment and longevity risk, and requires careful planning to avoid depleting your pension too quickly.
• Alan: £500,000 DC pension pot (£25,000 shortfall = 5% withdrawal)
• Barbara: £15,000 DB pension (Teachers Pension)
• Full State Pensions
• Income Requirement: £40,000 per year
• Medium risk, enjoys holidays and hobbies
Analysis: Drawdown allows Alan to maintain investment growth while supplementing Barbara’s DB income. Flexibility is important to support lifestyle goals.
• £400,000 DC pension, £40,000 savings
• State Pension at 67, DB Pension at 65 (£25,000)
• Income Requirement: £35,000 per year
• Low-risk profile
Analysis: A combination of partial drawdown with a small annuity could secure guaranteed income while maintaining flexibility for market growth.
• Brian: £20,000 DB pension + £10,000 spouse’s pension, £300,000 DC pension
• Linda: £15,000 DB pension
• Income Requirement: £40,000 per year
• Brian is in ill health
Analysis: Annuities may suit Brian due to health considerations and the need for predictable income.
• £400,000 DC pension, high ATR
• Full State Pension
• Income Requirement: £40,000 per year
• Wants to retire early, concerned about running out of money
Analysis: With such a high withdrawal rate, Mark may need to rethink his retirement plans. Drawdown could provide flexibility, but withdrawing too much too soon could deplete his pension pot. A careful assessment of sustainable withdrawals, lifestyle adjustments, and timing of retirement is essential.
• Should I pay off my mortgage at retirement? It depends on your income needs, interest rates, and whether early repayment frees up cash flow.
• Can I continue to pay into my pension after retirement? Yes, contributions can continue if you have sufficient income, subject to annual allowance limits.
Choosing between an annuity and drawdown depends on your income needs, risk tolerance, and retirement goals. Annuities offer security, while drawdown offers flexibility and potential growth. For many, a combination of both may be appropriate to balance certainty and investment potential.
Wealth of Advice can help you assess your retirement income options, model sustainable withdrawals, and choose the strategy that works best for you. Explore our free guides, blog posts, and calculators to make informed decisions about your pension today.
If you want a better view of what your future could be, we'll have a chat and work out if we make a good fit for you and your financial picture.
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