08 Sep 2023
Opting for a mix of an annuity purchase and flexible drawdown can help savers enjoy the security of a guaranteed income in retirement, without sacrificing flexibility and investment returns. Lumin Wealth’s Managing Director Martin Cotter explains more.
Rate increases over the past year have seen annuities become a relatively more attractive retirement option. But a lack of flexibility remains a concern for certain savers.
A ‘blended’ solution that incorporates an annuity purchase with a segment of pension funds, while keeping the remainder invested and easily accessible, could provide the right balance.
The appeal of annuities
Annuity rates have risen substantially over the past year from the lows seen over the five-year period from 2016 to 2021. This has made them a more appealing proposition for retirees who wish to benefit from the safety net of a guaranteed income during their retirement.
Flexible drawdown
Annuities are, however, inflexible, as once taken out they cannot be changed. They also can’t be passed down generations, unlike flexi-access pensions, while purchasing an annuity could result in missing out on potential investment growth.
With annuity rates low in previous years, many savers have opted for a flexible drawdown approach when they reach 55, taking 25% of their pension as tax-free cash, and
keeping the remaining funds invested, dipping into it as and when it is needed.
A blended retirement solution
With annuity rates currently attractive, a two-pronged approach could be a valid solution. Individuals can access their tax-free cash at the outset. A portion of the remaining pension funds can be used to purchase an annuity, while the remainder is kept within the pension wrapper. This provides a guaranteed income for life (or a set period). At the same time, you can keep some money invested for the long term. Any remaining flexi-access funds can then be passed on to beneficiaries without an inheritance tax charge applying.
Drawdown vs. an annuity
When weighing up the pros and cons you should consider the income possibilities of each strategy. In previous years, given low annuity rates, there has been a risk that the total income received is less than the pension savings used to purchase the annuity. But with rates now much higher, opting for a two-pronged solution that allows you to tap into the benefits of both an annuity and flexible drawdown could be a sensible compromise, depending on your investment and retirement goals.
A financial adviser can help you assess your income needs and plan properly for retirement. Call 01727 893 333 to find out more, or visit luminwealth.co.uk.
