Answered by Michael Englefield
The Difference Between Annuities and Pensions
In broad terms, the main difference between an annuity and a pension is that you buy an annuity after retirement to provide you with a guaranteed regular income, whereas you save into a pension pot throughout your life.
You can use your pension pot to supplement the state pension you receive from the government at state pension age.
Although many people think of a pension as something they receive after they retire, technically that’s not the case.
A defined benefit pension pays you out a regular income for life after retirement. With a defined contribution pension, you have to turn your pot of savings into a retirement income when you want to stop working. There are a number of different ways to do this.
Pension Drawdown vs Annuity
For a defined contribution pension, also known as money purchase pensions – which I assume you have as you’re considering buying an annuity – you have two main options at retirement. These are:
When you buy an annuity, you exchange all or part of your pension pot for a regular retirement income for life. This income is protected against investment risk and can be index-linked so that it rises with inflation.
However, if you want your pension pot to remain invested throughout retirement, giving it the chance for investment growth, an annuity may not be for you.
A more versatile option in how you take your income would be drawing down your pension. Here, you can take cash lump sums and/or income payments from your pension pot as you see fit.
The rules around inherited drawdown pensions offer greater flexibility than is the case for an annuity, also.
So while the difference between an annuity and a pension is that an annuity is typically bought with your pension pot, buying an annuity is not the only option. Nor may it necessarily offer the best retirement income provision for you.
For help and advice on your retirement, don’t hesitate to get in touch with a pensions expert. You can speak to one of the team on 02084327333.
Frequently Asked Pensions Advice Questions
Victoria was very helpful taking time to explain the details of the policies and making every effort to find the best insurance for me. Would happily recommend.
Extremely satisfied with the help and advice from Drew, since the beginning him understood what I was looking for and had the patience to help me out with all my questions and doubts. Didn’t try to be pushy or annoying calling me all the time like so many did before. At the end we found the perfect medical policy for me and my daughter that covers everything that we need. I more than recommend them and if in the future I need something else for sure I will contact them again. Giving only 5 stars because I can’t give 6!!!!
Egle was brilliant in guiding us through the options available for relevant life insurance, took care of all the paperwork and presenting suitable options to us and deciphering all the jargon for us. Highly recommended!