Annuity vs drawdown: 3 things to do to find the right pension for you

At the point of retirement, we face two key choices when it comes to what we do with the money we've been saving all these years. We can either go into 'drawdown' to use our money as and when we need it, or take out an 'annuity' to secure a guaranteed income for life.

Recently, annuities have been in the news as higher interest rates have renewed their popularity. But which option is truly best for your unique circumstances? The right choice depends on your retirement goals, financial attitude, and several other key factors.

Making Sense of Your Pension Options

Standard Life's Annuity Rate Tracker shows that annuity rates for a healthy 65-year-old have increased by around 8% over the past 12 months. This translates to an annual income of £7,360 based on a £100,000 pension pot – an increase of £550 compared to January last year.

When deciding between drawdown and annuities, you'll need to consider:

• Your attitude toward investment risk and market fluctuations

• Whether you need guaranteed income or prefer flexibility

• How your spending might change throughout retirement

• The potential advantages of a blended approach for different needs

The Key Differences

Pension drawdown keeps your money invested while allowing you to take flexible withdrawals. You can take up to 25% as tax-free cash, with the remainder staying invested with potential for growth – though values can fall as well as rise.

Annuities, on the other hand, exchange your pension savings for a guaranteed income. Once purchased, they provide certainty but limit flexibility. With today's improved rates, they're becoming an increasingly attractive option for many retirees.

As Dennis Hall, Chartered Financial Planner, explains:

- "Annuities suit people who are looking for an element of certainty in their finances. They won't necessarily purchase an annuity with their whole pension fund but may want to ensure their basic costs of living are covered by a guaranteed income."

Real-Life Decision Making

To understand how these options work in practice, let's consider the approach of two retirees with identical £300,000 pension pots but different priorities.

Linda and Robert are both 66 years old and recently retired. They're facing the same decision you might be contemplating: drawdown or annuity? Their different retirement goals and financial attitudes led them to make different choices.

Which approach delivered better results? And what lessons can we learn from their experiences?