Annuity Alternatives

Some people may not need the security and regular payments provided by a conventional annuity. In this instance, there are alternatives to buying an annuity, the most common of which are detailed below.

Why would I not buy an annuity?

Not buying an annuity may increase income but opens the pension fund to risk.

Pension holders may prefer to use self-investment to maximise income, protect their pension pot for their family, vary their income, generate income in a different way for tax reasons, or simply desire higher value than a conventional annuity can provide.

Alternatives to Annuities

All of the alternatives to choosing an annuity carry elements of investment risk, and are really suitable for people who can afford this risk. Alternatives to buying an annuity include an unsecured pension, income drawdown, phased retirement, alternatively secured pension and others.

Once you have purchased an annuity, you cannot change your mind, so at least investigating the alternatives is a good idea. It is possible to avoid buying an annuity at all by relying on income drawdown until the age of 75, and then choosing an alternatively secured pension. This is a complex area of financial services, because although not choosing an annuity provides flexibility, it may attract extra risks and costs.

Income Drawdown

Income drawdown is a way of taking income directly from your pension pot whilst it remains invested. The aim is to keep the fund topped up by investment growth. Those choosing income drawdown can stop at any point and purchase an annuity. If the pension holder dies during income drawdown, their heirs can inherit the remainder of the fund.

Alternatively Secured Pensions

Upon reaching the age of 75, the pension holder must either purchase an annuity or an alternatively secured pension to keep money invested. ASP is similar to income drawdown although it is more limited. When the pension scheme holder dies, the remaining fund will continue to provide an income for the dependants, but it cannot go into the estate.

Those who go into income drawdown risk seeing lower rates of retirement payment when they come to buy an annuity, and also miss out on the income that they would have gained.

Furthermore, the pension fund may fall in value over time, and charges such as investment management charges or administration charges may add up over time.

Income drawdown and ASP are thought to be most suitable for those with a large pension fund of over £100,000, or those who have significant alternative investments that they can use to retire with.

Phased Retirement

Phased retirement is a form of pension plan that accepts existing funds and gives the pension holder the option of buying an annuity or entering income drawdown in several stages, rather than in one go.

Each year, someone in phased retirement chooses how much income is needed and cashes in as much of pension fund required to provide the income. You can take out a phased retirement plan at any time after retirement age.

Phased retirement is suitable for those people who wish to vary their income from year to year, wish to benefit from pension fund increases and accept the risks if it falls, have alternative sources of income and do not need the security of a conventional annuity, wish to maximise the benefits that their family receive.

Phased retirement does not guarantee income and carries greater risks than conventional annuities