Do I take income drawdown or an annuity?

Your pension provider will write to you before you retire and offer you a regular income. In most cases, this offer is not as good as the income you will receive if you shop around on the open market.

When you decide to retire, your pension pot doesn’t have to become an annual income for life. When to buy an annuity is a very big decision for most people with a pension fund. Making the right choice means you need to have a good understanding of the options available at retirement.

Once you buy an annuity, there’s no turning back, the decision will affect you for the rest of your life.

Unfortunately, the average person, living in the UK, does not have a large personal pension or final salary scheme. Most of us are now in money purchase schemes, this means our regular contributions are invested in equities, bonds and other asset groups, the income we get at retirement depends heavily on how well our managed pension investments have performed.

At retirement, you do have a choice, if you are under 75, you do not have to buy an annuity, you can choose to keep your fund invested but withdraw money as and when you need it. This is income drawdown.

For annuities and income drawdown you can take up 25% of your pension pot in tax free cash, many take this option.

Income drawdown allows you to put off making a decision on when to buy an annuity. Rates are currently very low (14 March 2013), income drawdown gives you a flexible option, a good choice for many people in the early stages of retirement.