I draw down £3k a 12 months from a pension pot – ought to I purchase an annuity?

I retired in 2021 and moved considered one of my pension pots to a big agency by way of a monetary adviser.

After taking my 25 per cent tax-free lump sum I used to be left with slightly below £50,000. 

From this, I agreed to take £3,000 per 12 months for 5 years, beginning in March 2022.

I’m now questioning if I’d be higher off if I discontinued the present drawdown (three years nonetheless to go) and took the remaining quantity as an annuity on condition that rates of interest are a lot greater now and due to this fact I assume annuities may have improved additionally.

Would I’ve to make use of the identical agency for the annuity as they at the moment maintain my pension pot or am I in a position to store round and can the switch incur any charges?

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Steve Webb replies: In a world the place many individuals attain retirement with very small pension pots, the most typical selection by far is to money in the whole thing, taking a tax free lump sum and paying tax on the remainder.

But, over time, extra folks shall be in the identical place as you, having constructed up a extra significant pot.

In this case, cashing in the whole thing will not be the best choice as you might face an enormous tax invoice and you could miss out on the prospect to develop your pot additional.

The query then arises as to how your cash needs to be invested post-retirement.

Under guidelines set out by the Financial Conduct Authority, your pension supplier has to ask you about your plans for the subsequent 5 years, and can then make decisions about how your cash is invested primarily based in your reply. 

This course of is called placing you on an ‘Investment Pathway’.

Under the principles, you might be given 4 choices to select from concerning your plans:

A. I’ve no plans to the touch my cash within the subsequent 5 years;

B. I plan to make use of my cash to arrange a assured revenue (annuity) within the subsequent 5 years;

C. I plan to begin taking my cash as a long-term revenue within the subsequent 5 years;

D. I plan to take out all my cash within the subsequent 5 years.

As you may think, one of the simplest ways to take a position your cash is perhaps moderately completely different for those who don’t want to the touch your cash in any respect for 5 years as in opposition to if you’ll take the whole thing out.

The thought of this course of is to allow your pension supplier to set issues up in a manner which most closely fits your intentions at retirement.

However, an important level to concentrate on is that you’re not certain by the reply you give, and you may change your thoughts at any level.

You might additionally range the quantity you draw down, however at all times verify the principles first in case there are limits or prices to having extra flexibility. 

In your case, it sounds as if at retirement you took your tax free lump sum however determined to depart the remainder of your pot to be invested, drawing a comparatively modest sum every year (possibility C from the record above).

But you might be totally free to do one thing completely different together with your drawdown fund, whether or not as a result of your circumstances have modified or as a result of market situations have modified.

In phrases of utilizing your fund to purchase an annuity, the traditional course of can be so that you can be given what is known as an ‘Open Market Option’.

In easy phrases this implies you possibly can take your cash to any annuity supplier and so it’s best to store round for the perfect charge you may get primarily based by yourself particular person circumstances.

I’d be shocked in case your drawdown supplier charged you for deciding to maneuver out of drawdown however it’s best to in fact verify with them earlier than making any choices.

On your wider level, you might be fairly proper that annuity charges are actually usually loads greater than they had been while you first took your pension a few years in the past. But the speed of return you may get on cash invested in your pension can also be prone to be greater.

If you keep on investing you may be taking some funding danger however you’ll doubtlessly profit from a development within the worth of your fund.

On the opposite hand, for those who purchase an annuity you’ll benefit from the certainty of a assured revenue however most likely get a decrease return total.

The proper reply will rely in your particular person circumstances and the way snug you might be with the uncertainty of investing.

I’ve coated a few of the execs and cons of shopping for an annuity in my earlier column right here: What is the perfect age to make use of my £220k pension to purchase an annuity?

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