Combining an annuity and drawdown

Posted By: Phil Handley DipPFS AwPETR On June 1, 2016 Category: annuities drawdown pension

Combining an annuity and pension drawdown can give you the best of both worlds. Traditionally people opted for the security of an annuity at retirement, but since the new reforms and the flexibility they offer, pension drawdown has become the product of choice.

One of the major concerns with people entering drawdown however, is their lack of investment experience and/or appetite to keep an eye on the stock market to ensure the fund is performing.

It’s all well and good having the flexibility to access your complete fund through drawdown, but it comes with the extra risk that it may run out before you reach the end of your retirement years.

Annuities offer the security that your income won’t run out, however doesn’t come with the flexibility and access to capital that drawdown does.

So what do you do?

Well, the answer could be a bit of both.

Using some of the fund to buy a guaranteed lifetime income through an annuity, whilst putting the remaining fund in drawdown.

This gives access to additional capital if needed, without exposing your complete pension savings to the stock market.

It also allows you to manage your income tax bill increase and decreasing yearly income

The emergence of this so-called ‘Blended Solution’, has led to a number of providers offering this combination though one single product.

The Retirement Account by Retirement Advantage offers a combination of drawdown and annuity but it’s all wrapped up in one plan. The whole plan falls under drawdown rules, which is advantageous because stand-alone annuity rules aren’t as favourable.

LV offer their take on a blended solution but with a bit more flexibility. They propose using a fixed term annuity alongside a drawdown plan.

The fixed term annuity provides a known income for a set period. The fixed term annuity isn’t linked to stock markets and therefore doesn’t carry investment risk. At the end of a specific term the fixed term annuity will mature, providing a lump sum to the either reinvest in a conventional annuity, put into another fixed term annuity, move into drawdown or withdraw as a lump sum.

The fixed term annuity is wrapped into one account with LV’s drawdown proposition. They both fall under drawdown rules and therefore remaining capital is owned by the estate and not lost on death.

This method could be of particular use if the retiree doesn’t have any medical history and therefore won’t qualify for enhanced annuity rates. The fixed term annuity could provide an income whilst not tying the retiree into unfavourable healthy rates for life. At the end of the fixed term, any subsequent medical conditions could then be used to lock into a lifetime annuity at better rates.

Partnership offer an Enhanced Retirement Account which again blends an annuity with drawdown. Partnership are marketing their plan as a ‘low cost’ solution due to the fee’s being comparatively lower than other plans on the market.

Partnership have a reputation for offering good enhanced annuity rates for people with a bit of medical history. This means less may be needed from the pension to provide the needed income resulting in more being available in the drawdown plan.

The alternative to using one of the pre-packed blended solutions is to create one yourself. This would mean sourcing the best annuity rate on the open market and creating your own drawdown portfolio.

The administration would be more, however you may be able to create a more suitable package. The cost to purchase your chosen level of annuity income would be the lowest and you could find a more tailored portfolio of investment.