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There are two alternatives to buying an annuity. Capped drawdown allows you to keep your pension pot invested and withdraw money each year as long as it is no more than you would get out of a flat-rate annuity. Flexible drawdown allows you to take what you like out of it each year as long as you already have a guaranteed annual income of at least £20,000 from other pension arrangements.
The PPI found that around 700,000 people would have the guaranteed income needed for flexible drawdown but only around 200,000 would have a sufficient pension pot left to take advantage of it.
Another 700,000 might have sufficiently large pension pots – above £100,000 – to take advantage of capped drawdown. If your pot is below that no Independent Financial Adviser will normally suggest you use capped drawdown – there are ongoing charges which you avoid by taking out an annuity. And an annuity gives you a guaranteed income for life whereas with capped drawdown you decide your income but there is no guarantee that your pension pot will last as long as you do.
The PPI estimates that around 7% of those aged 55-75 can take advantage of the new rules. So there is a choice. But only for the wealthiest.
For more details, visit www.pensionspolicyinstitute.org.uk - click on 'Publications', then 'Retirement income and assets'.
Written by Paul Lewis, this article was first published in the June 2011 issue of Saga Magazine. Paul's opinions are his own and for general information only. Always seek independent, professional, financial advice.