There are pros and cons to all retirement products, depending on your individual circumstances. Below are some of the general ones for each product. We always recommend you speak to your financial adviser before making any decision.
Annuities
Advantages:
- They're simple and easy to understand.
- You get a guaranteed fixed income that can be paid for a set period of time, usually five or 10 years even if you die, and can increase every year if you want.
- You'll receive an income for life, no matter how long you live.
- The pension fund you need to buy an annuity is generally much lower than what you would need for income drawdown or phased retirement.
- You don't need to review them on an ongoing basis.
- There isn't any investment risk as you aren't subject to any stock market falls.
Disadvantages:
- They can be inflexible. It's important to understand that once you buy an annuity, you can't normally change its terms.
- You can't generally pass an annuity (without value protection) on to your beneficiaries as a lump sum.
- The income you receive depends on annuity rates, which are currently thought to be quite low.
- If you want to provide an annuity for your spouse or partner on your death you must set this up when you buy your annuity - so this can be wasted if you divorce or if your spouse or partner dies before you.
- You won't benefit from any investment growth or stock market rises.
Phased retirement before age 75
Advantages:
- You can keep good control of your income as you can cash in more segments as and when you need to, if at all (up to age 75).
- Segments that you haven't cashed in will benefit from any investment growth.
- Segments which you haven't cashed in are returned to your dependants without being charged for tax, (provided there is enough of your lifetime allowance left) compared with a tax charge of 35% for income drawdown.
- The tax-free cash that you get when you cash in segments will boost your income in that particular year.
- Any segments which you haven't cashed in will benefit from mostly tax-exempt growth.
- You can avoid buying an annuity when rates are low.
- You can defer buying a spouse's or partner's pension in case they die before you (although this is an unpleasant and morbid thought, it's something you need to consider).
- With our Phased Retirement Plan, you can access our self-investment facility at a competitive cost.
Disadvantages:
- You can only take your tax-free lump sum in stages as you cash in segments.
- It's a complicated product that needs regular reviews, especially if you combine it with income drawdown.
- You still have to buy an annuity or transfer into alternatively secured pension when you reach age 75.
- If you've put the balance of your vested segments after tax-free cash into income drawdown, you could find that your income runs out entirely if investment returns fall and you've been taking withdrawals.
Income drawdown before age 75
Advantages:
- You control where you invest your money.
- Your fund may benefit from any investment growth.
- Your level of income can increase or decrease (within limits) to meet your current needs.
- You don't have to make a one-off decision.
- You can pass your pension on to your dependants (less any tax which applies).
- You have more flexibility and choice as to how and when you receive your income.
- You can defer buying a spouse's or partner's pension in case they die before you (although this is an unpleasant and morbid thought, it's something you need to consider).
- With our income drawdown product, the Retirement Cash Account, you can access our self-investment facility at a competitive cost.
Disadvantages:
- You'll need financial advice as this is a complex product.
- It needs regular reviews.
- Your fund value may fall if investment returns fall.
- Your fund value may fall if you take high levels of income.
- Your fund may be too small, making this product too expensive.
- You could find that your income runs out entirely if investment returns fall and you've been taking withdrawals.
Alternatively secured pension
Advantages:
- You can postpone buying an annuity after the age of 75.
- Your fund can benefit from any investment returns.
- You retain control over when and how you take your income.
- With our Alternatively Secured Pension, you can access our self-investment facility at a competitive cost.
Disadvantages:
- Your fund could be liable to an Inheritance Tax charge on your death.
- You'll need financial advice as this is a complex product.
- It needs regular reviews.
- Your fund value may fall if investment returns fall.
- Your fund value may fall if you take high levels of income.
- Your fund may be too small, making this type of product too expensive.
- You could find that your income runs out entirely.
