Pension option has ‘transformed’ retirement for Britons – could you take advantage?

Martin Lewis compares pension annuity against drawdown

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Pension saving can be a challenge, however, there are certain choices which may suit Britons more than others. One which many people should consider, according to an expert, is drawdown – a choice which allows savers to withdraw money while their fund keeps growing. As a comparatively newer retirement choice, however, some individuals may not be fully aware of the advantages this could bring. spoke exclusively to Amy Goodall-Smith, Chartered Financial Planner at Goodall-Smith Wealth Management, who discussed the changing pension landscape, and benefits for Britons.

She said: “In 2015, the Government enacted Pension Freedom legislation which has transformed retirement options for people.

“Prior to this, how you accessed your defined contribution pensions was extremely rigid. You could access 25 percent as a tax-free cash withdrawal, and the remaining part had to be taken as a regular payment for life, typically using an annuity.

“Now this has completely changed, once a person reaches 55 they can use the funds for a wider range of options, such as drawdown.

“This allows complete flexibility on how much you withdraw form your pension each year.”

Drawdown could be a suitable option for many people, especially as attitudes to working life change amid the pandemic.

Ms Goodall-Smith noted many are now embarking upon phased retirement, where they drop their working hours and see their salaries slowly decrease as a result.

However, drawdown could provide the financial solutions a person needs to continue to keep them afloat.

She continued: “The pension drawdown option allows you to ‘top up’ your income by withdrawing some money from your pension savings but the amount you take each year can vary according to your circumstance. 

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“As you drop your hours of work, you can increase the withdrawal amounts from your pension. Whereas with the annuity it is set in stone for life. 

“So, the drawdown option gives you much greater flexibility than ever before. 

“It also allows your pension to remain invested so you can still achieve growth on your pension, which an annuity doesn’t allow for. It enables you to pass your full pension value to your spouse, and then to your dependants, which again is not available in the same way via an annuity.”

There are, however, drawbacks to consider when it comes to the idea of a drawdown – and it is not all positive for everyone.

Individuals will need to plan their withdrawals very carefully, as taking too much in the earlier years means someone could risk outliving their savings, leaving them with nothing.

Whereas, with an annuity, a person has a guaranteed and set income for life and therefore will not have to worry about managing their funds themselves.

However, Ms Goodall-Smith expressed her worry about the lack of pension understanding and knowledge amongst Britons, which could leave them worse off.

She continued: “Most people are unaware of all these options as your pension providers will still write to you on your retirement date, and will still often only offer you the option of purchasing an annuity.

“It is really important that you seek advice and see what is available to you and what would suit your circumstances the most.”

The expert therefore urged people to look into the appropriate options for them before they take the leap into retirement.

She stated fund selection is one of the key ideas individuals should be considering for retirement.

Ms Goodall-Smith added: “Most clients we speak to are in the default fund they had when they took out their pension. They often have never reviewed this fund selection. 

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“Many are in an old ‘with profits’ style fund which has was very popular in the late 90’s early 00’s but usually less favourable now. 

“Or in what is known as a lifestyle fund, this fund automatically de-risks the portfolio as you near your retirement age, moving from larger equity content to a larger fixed interest or cash content. This is the strategy used for those people who were going to buy an annuity at their retirement age. 

“They want to consolidate their growth as they know at retirement, they are going withdraw their money to buy an annuity so need to make sure they have little fluctuation in the fund value. 

“Whereas, if you are going to take the drawdown option then you will remain invested so there less need to be concerned over market fluctuations in the short term.”

As a result, Ms Goodall-Smith stressed it is vital to seek advice about one’s attitude and capacity for risk.

Many Britons will choose to opt for the services of a financial adviser who is likely to be able to go into detail regarding a person’s circumstances.

However, the Government also has a free service PensionWise, which is designed to provide assistance. Citizens Advice and MoneyHelper can also assist Britons with any of their financial queries. 

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