What are the alternatives?
Deciding how to take your pension benefits is one of the most important financial judgements you will have to make. At one end of the scale is the dependable secure income for life that comes with conventional annuities; at the other is the much more flexible but riskier income drawdown. Recently we have also seen products introduced that fall somewhere in between annuities and drawdown, however these tend to be expensive, as drawdown was when it was first introduced.
The main options at retirement are:
- Lifetime annuity – also known as secured pension.
- Income drawdown – Also known as unsecured pension. This is available up to age 75.
- Alternatively secured pension – often referred to as ASP. This is a continuation of income drawdown from your 75th birthday with more limited income and more restrictive death benefits.
If at all unsure about income drawdown or ASP we strongly suggest you seek advice.
Quick comparison of the main options
| Conventional lifetime annuity | Income drawdown (unsecured pension) | Alternatively secured pension (over age 75) |
|
|---|---|---|---|
| Tax-free cash | Must be taken at the start | Must be taken at the start | Not available |
| Is the income secure? | Yes | No | No |
| Taxation of income | Taxed at source under PAYE | Taxed at source under PAYE | Taxed at source under PAYE |
| Benefit flexibility | Once set up the annuity is fixed and can't be changed by either party, no matter what income is guaranteed by an insurance company | Income can be varied, subject to maximum limit. A lifetime annuity can be bought at any time, or at age 75 the fund must be moved to ASP | Income can be varied subject to restrictive minimum and maximum limits. A lifetime annuity can be bought at any time |
| Investment choice | No investment decisions needed | The fund can be invested in a wide range of investments | The fund can be invested in a wide range of investments |
| Ongoing reviews needed? | No | Yes | Yes |
| Flexible death benefits | Fixed when annuity is bought | Yes | Limited |
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