The pros and cons of income drawdown

Here we provide a quick summary of the advantages and disadvantages of annuities and income drawdown/ASP.

Conventional Annuities

Advantages:

• Simple, easy to understand
• Once set up, income is fixed and secure
• The income will never run out, however long you live
• Available for pension funds of all sizes
• No ongoing reviews required
• Simple, easy to understand
• No investment risk: not affected by stockmarket falls, or economic slumps

Disadvantages:

• Can be inflexible
• Cannot be changed
• An annuity (without value protection) cannot generally be passed on to your beneficiaries as a lump sum
• Current annuity rates are perceived to be low
• Spouse’s benefits must be set up at outset – so can be wasted on divorce or if spouse dies first
• Not affected by stockmarket rises

Income Drawdown before age 75

Advantages:

• You do not have to make a one-off decision
• You retain investment choice and control
• Can potentially pass pension on to beneficiaries (less tax where applicable)
• More flexible
• You can plan the income you receive to match your requirements
• Potential for growth and increasing income

Disadvantages:

• More complex, you may need advice
• Requires regular review
• Can be expensive: may not be cost effective for smaller funds
• An annuity set up on day 1 may have offered a greater total income over lifetime
• High income withdrawals and/or poor investment performance can strip the fund bare
• The income and value of the fund can fall, and at worst the income could run out. There is no security of income.