Annuity Pension - Do I have to buy an annuity when I retire?

A common complaint from a lot of people reaching retirement age, especially those fortunate enough to have substantial funds, is “do I have to buy a pension now and what happens to the money if I die?”.

It is understandable that anyone who has invested substantial sums into a pension throughout their lifetime, should be concerned about the previous two questions. So let’s deal with these now.

When you reach retirement age, as explained in previous posts, you will be faced with a number of choices which could have a substantial impact on your eventual income. In my previous posts I have only as yet dealt with the annuity options, but there is currently another option available, referred to as “Income Drawdown”.

This is an alternative to the compulsory purchase annuity, although this option is open to anyone, it is better suited to those with a large fund, normally in my view in excess of £150,000 and it may not be suitable for everyone for various reasons, which I will deal with in future posts.

The answer to the first question therefore is No you do not necessarily have to buy a pension now.

In answer to the second question, if you have purchased an annuity, you have given up control of your pension fund in return for an income paid for your lifetime and possibly that of a spouses lifetime if you should pre-decease her or him if. There may also be a guaranteed period included.

If however you choose the Income Drawdown route instead of annuity purchase, you need not buy an annuity until you reach age 75, which means you can keep control of the pension fund up to age 75 and in the event of your death before age 75 the remaining fund would be available for distribution to your spouse or dependents.

Income Drawdown is a fairly complicated concept, but in my view is a very flexible retirement planning vehicle and should not be overlooked, especially for those with larger pension funds and who have access to other income or capital.

I would recommend that anyone considering this as a retirement option should always seek Independent Financial Advice to ensure that they fully understand the implications before proceeding.

I will be looking at the advantages, disadvantages and the workings of Income Drawdown in more detail in my next few posts, so if this is of interest please join me.