No-one should be deterred from planning for their retirement by the jargon used in the pension industry.
Happily, we’re well versed in turning complex financial terms into plain English. Here we unravel a couple of terms that you may have come across and be unclear about.
ANNUITIES – When you retire, you can choose to take some or all of your pension pot as an annuity, an insurance product that provides a guaranteed income for life. One of the benefits that annuities provide is security. Unlike other retirement income products, and with the exception of investment-linked annuities, you aren’t exposed to stock market risk which could erode your income. On the downside, should you die early, the residual value of the annuity dies with you; there is usually no return of capital to your estate.
DRAWDOWN – With income drawdown, you take a retirement income direct from your pension pot while leaving the rest of the cash invested, providing an opportunity for future growth. There is no minimum amount for drawdown, so you could, for instance, take your 25% tax-free lump sum and choose to leave the remaining funds invested. You can also move funds into drawdown in stages, known as partial or phased drawdown. The 25% tax-free amount doesn’t have to be taken at once on retirement – smaller amounts can be taken over time, each with 25% tax-free.
Once in drawdown you can access funds as you need them. You could, for example, vary the amount you take each year, taking less if you wish to remain in a lower tax band, or more if you have plans to spend. After taking your 25% tax-free cash, your withdrawals will be subject to income tax and your drawdown income is added to any other income you receive in that tax year. It’s important to remember that taking large withdrawals may result in you paying tax at a higher rate.