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A balanced view of annuities and drawdown

A balanced view of annuities and drawdown

What is this all about? – Explaining the difference between annuities and drawdown.

Why is it important? – converting your pension pot into cash and income is important and you should analyse all the options, not just the one you like at first sight.

What is the point? – A financial adviser will give you a balanced view but if you make your own decisions or go to a non-advised broker you may be blinkered.

Generally speaking, there is a big divide between annuities and drawdown.

On the one hand there are people who simply dismiss annuities as irrelevant and think pension drawdown is the only option.

On the other hand are people who are attracted to the guarantees that annuities provided and think drawdown is too risky.

In one respect annuities and drawdown are just different sides of the same coin – both convert pension pots into income but one is guaranteed and one is not.

But in another respect they are very different financial arrangements and increasingly advised or sold in different ways.

An annuity is essentially an insurance policy that guarantees the annuitant (or their partner) never runs out of money.

Drawdown is essentially an investment proposition where the pension pot is invested in the stock market and income is withdrawn at regular intervals.

Drawdown is usually set up by a financial adviser and therefore there a lot of thought and analysis goes in the advice process and all the relevant options (both annuities and drawdown) are discussed. This means that clients should understand all the key issues and risks. However, an increasing number of people are investing in drawdown plans without advice and the jury is still out to whether they have done the proper analysis.

Annuities are mainly sold by non-advised brokers, and although they follow all of the relevant rules customers do not get to understand the other options and the analysis is one sided. This means that although customers will get the highest paid income, they may not necessarily be buying the right type of annuity and they may not fully understand all the options and risks. Some annuities are arranged by the financial advisers, and just like drawdown there should be proper analysis.

So what’s the problem if some people buy annuities and others get advice on drawdown?

The problem is that unlike many other important transactions, if you get it wrong at the beginning you may not be able to rectify your mistakes or make up for any losses.

For example, if make the wrong investment you can always sell it and invest in another fund. You might have made a loss but with some good investment advice you should be able to get back on track over the longer term.

But if you buy the wrong annuity or make the wrong decisions you cannot change your mind at a later date.

With drawdown; if you make the wrong decisions at the outset you can change your mind but because of the mysterious effects of ‘sequence of return risks’, it may be much harder to make up for the initial losses and get back on track.

About the author

Billy Burrows

Billy Burrows has been involved with retirement options for over 20 years, advising clients on all aspects of pensions and retirement income options.

He divides his time between advising individual clients as Retirement Director at Better Retirement and running Retirement IQ, which publishes guides including the popular ‘You and Your Pension Pot’ and ‘The Retirement Journey’.

He is frequently quoted in the national press and appears on radio, podcasts and videos and writes extensively on retirement income matters.

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This website is run by William Burrows and publishes generic information on annuities, drawdown and other related retirement income matters. Any information you use is at your own risk and does not constitute financial advice.

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