Income Drawdown Vs Conventional Annuities

Income Drawdown Vs Conventional Annuities – Pensionfinder









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    Income Drawdown Vs Conventional Annuities

    Income Drawdown ComparisonBoth options have their plus and minus points as well as their opponents and proponents. Below is a list of the main pros and cons of Conventional Annuities and Income Drawdown/Alternatively Secured Pension.

    Regular Annuities

    Pros

    • Ÿ  They are easy to set up and can be understood by anyone
    • Ÿ  You have a secure income which is safe once everything is set up
    • Ÿ  There is no chance that the money will ever run dry during your lifetime
    • Ÿ  There are options regardless of the size of your pension pot
    • Ÿ  You do not have the hassle of regular reviews
    • Ÿ  As you are not dealing with funds, there is no chance of losing money through volatile shares 

    Cons

    • Ÿ  They are not particularly flexible
    • Ÿ  Once set up, they cannot be altered
    • Ÿ  Unless you have value protection, you will not be able to pass the annuity on to a dependent as a single lump sum
    • Ÿ  It is likely that you will receive a poor rate of interest
    • Ÿ  If your spouse is to receive benefits, they must be included at the outset. If the spouse dies first or if a divorce occurs, these benefits are wasted
    • Ÿ  If the stock market rises, you will not benefit

    Alternatively Secured Pensions/Income Drawdown

    Pros

    • Ÿ  Unlike annuities, you are not pressured into making one ultimate choice
    • Ÿ  You control your pension by choosing all your investments
    • Ÿ  Your beneficiaries could receive your full pension in one lump sum if you die before the age of 75. They would be subject to a 35% tax charge
    • Ÿ  They are far more flexible than regular annuities
    • Ÿ  If you have certain financial requirements, you can tailor your pension to meet these needs
    • Ÿ  If the stock market goes in your favour, your pension could grow in value significantly 

    Cons

    • Ÿ  These plans are not easy to understand. You will probably need to contact a financial advisor for assistance
    • Ÿ  There are regular reviews required which can be irritating and stressful
    • Ÿ  The nature of these plans means that smaller funds are not suited to what can be an expensive way to invest
    • Ÿ  As annuities are more secure, there is the possibility that a regular annuity purchased on the first day of retirement will earn more over your lifetime than alternatively secured pensions or income drawdown
    • Ÿ  As investment funds often require a large amount of initial capital, there may be very little ready cash available in your pension pot
    • Ÿ  Investment funds can rise or fall. There is absolutely no guarantee that your fund will increase in value with a loss always a possibility

    Alternatively Secured Pension

    With an ASP, an income must be made available for your dependents or spouse regardless of whether it comes in the form of income drawdown or an annuity. In the event that you have no beneficiaries, the entire value of the fund at the time of your death will be given to a charity of your choosing with no inheritance tax necessary.