What are the alternatives?

When considering income drawdown, it is essential to understand the main alternative option: a lifetime annuity. Both options have their own advantages and disadvantages.

To put it in simple terms, it is rather like choosing between a Volvo and a Ferrari. Both have their own strengths and weaknesses. It depends on what you want: something reliable for a family day out, or some excitement on a race track. It depends on your purpose and objectives, and both options need to be considered.

If at all unsure about income drawdown or ASP we strongly suggest you seek advice.

This page outlines annuities very briefly. For more detail, please see our annuities section.

Lifetime annuity (secured pension)

This is the most common option at retirement. It is also very simple: you exchange your pension fund, less any tax free cash, for a secure income for life. Annuities are normally purchased from an insurance company, using a service such as the Hargreaves Lansdown annuity quote service.

There are different options you can choose when setting up a lifetime annuity. For instance, you can choose an income that continues to a spouse or partner on your death (joint life) or one that is paid for your lifetime only (single life). Another option is to choose whether you want an income that increases each year, or one that remains level.

You can also choose a 'value protected' annuity that will pay out a lump sum (less a tax charge of 35%) on death before age 75, equivalent to the original purchase price less any gross income already paid.

If you smoke, or suffer from ill health, some annuity companies may offer you an enhanced income.

When most people talk about annuities they are referring to a 'conventional' annuity where the income is secure. It is also possible to buy an investment-linked annuity where the income is based on investment returns. Investment-linked annuities offer the opportunity for the income to increase, but as this depends on the performance of an underlying investment fund, the income can fall as well as rise.

With an annuity, the benefits need to be chosen at the start. The income then continues for at least the rest of your life, and for the rest of your spouse's life if you have chosen a spouse's pension. Once set up, you cannot normally switch annuity providers, or change the type of annuity. It is a one-off decision and unless you have chosen additional options the annuity will cease when you die.

Quick comparison of the options