The annuities and withdrawal are the two main ways to use your pan to finance your retirement. But how are they different? What option is best for you? And what risks do you need to know?
Our Money Blog team has set up a guide explaining everything you need to know about the two options.
First of all, let’s take a look …
Levy
This is a way to manage the way you spend your pan – and it is a much more flexible way to access your pension than its main alternative, the rent.
It allows you to gradually delete sums while leaving the rest invested.
Pensation providers and investment platforms offer the product, which is generally available for people aged 55 and over (switching to 57 from 2028) with a defined contribution pension, and not a final salary or defined service pensions.
How does it work?
You usually start by taking up to 25% of your tax -denying retirement pot.
The rest is moved to what is called a “direct debit account”, where it remains invested in funds of your choice, such as shares or obligations.
You can have income from this pot invested each time you wish – but everything you withdraw beyond the tax portion (25%) is taxed at your tax rate.
The risk
You have total control over the quantity to be removed and how often, which makes it flexible to change income needs – which seems ideal.
However, because your pot remains invested, it can increase or decrease depending on market performance.
Bad investment returns or withdrawal too early may mean that your money is exhausted. It can only take one global volatile event, such as Donald Trump imposing prices, to erase a significant value from your fund.
You must also make sure to take responsibility for the demerits – keep an eye on how it works, when eliminating the lump sum sums, etc.
If you don’t plan properly and don’t lack money, it’s on you.
Annuities
This financial contract converts your savings into an annual income, such as a state pension, rather than flexible prints.
The product is sold by insurance companies to people aged 55 and over and can be fixed or for life.
Payments are made annually, biannially, quarterly or monthly, and the quantity you receive depends on the size of your retirement savings, the characteristics of your particular pension and your health and your lifestyle.
How does it work?
Payment of rent is an annual percentage of the amount you convert. So, if you spend £ 100,000 from your retirement savings on a rent product at a rate of 5%, you will get £ 5,000 per year.
Once you have accepted the contract, you cannot change your pension, eliminate the flat -rate sums or transfer it to someone else.
There are different types of rent …
Fixed V lifetime
Life annuities guarantee you a defined income for the rest of your life, no matter how long this is.
Fixed or temporary annuities pay an income for a fixed period of time, often between three and 25 years.
This allows you to shop for other options once the contract is completed. Some people could use them as a bridge between retirement and the start of their state pension at 66.
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Pic: Istock
What rates are available
There are different packages, so let’s start with the simplest. Annuity level Pay the same amount of money each year, but they are vulnerable to inflation, which can reduce your standard of living over time.
The climbing of annuities provides a partial solution to this problem, increasing to a fixed percentage each year (for example 3%). The capture is that payments start at a rate lower than that of level annuities.
Inflation annuities increase in accordance with the retail price index (RPI), experiencing your income against inflation, but starting at a much lower rate.
Investment annuities invest part of your pension fund and pay an additional income – or not – depending on the performance of the investment.
Altered or improved annuities can be used if you have health problems that should shorten your lifespan. This makes it possible to make higher annual payments on the basis that insurance companies expect to distribute them over a shorter period.
Joint life annuities allow you to pay your spouse or partner after your death, but often at a lower rate. Or you can protect a lump sum in your initial agreement to be transferred to your loved one when you die.
Taxation
The annuities contribute to your personal allowance and, once reached, are taxable like any other flow of income. Remember that you have the right to reduce a free sum of 25% of your retirement pot.
An annuity paid to a spouse or a partner after your death is also subject to income tax, unless you die before the age of 75.
Advantages and disadvantages
In summary, here are the positive and negative points to consider.
Differences between withdrawal and rent
Here are the main differences between the two:
- Levy: Flexible access, investment growth potential, but no guaranteed income
- Annuity: A fixed and guaranteed income for lifetime or a defined period, but no potential for flexibility or growth once purchased
Can you mix both?
Yes – in fact, the number of people who make this develop.
You can divide your retirement pot – buy a pension with a game and use the drawdown with the other.
This hybrid approach helps to balance stable incomes and guarantee the growth prospect with the other – as well as the control of your remaining funds.