Two main options at retirement?

Having built up your pension fund over some decades, there are two main ways of converting your pension fund into retirement income. You can choose either an:

annuity, or
income drawdown (also called unsecured pension income or USP)

What is an annuity? In a nutshell, at your retirement date, you hand over your pension fund to an insurance company, and the company guarantees to pay you a certain level of income for the rest of your life. So you convert your capital to an income guaranteed for life.

That is the basic definition of a conventional annuity, but there are now other types of annuity not encapsulated in this definition. The most obvious, and popular, alternative is the with-profit annuity, and this and others are considered within Your annuity choices.

It wasn’t long ago that the purchase of an annuity was the only or primary choice, and the options were reasonably straightforward. The decision has become more complex in recent years as, by popular demand, other options have been introduced, and one in particular has caught the imagination of those with larger pension pots.

Income drawdown or unsecured pension income (USP). The introduction in 1995 of income drawdown has presented significant flexibility for those with larger funds. It meant that you didn’t have to buy any kind of annuity, and you could leave your pension fund more or less intact (at least until age 75). This flexibility can come at a cost, and more risk (see Income drawdown).

These newer alternatives, whether income drawdown or with profits annuities, tend to come with more risk, and these risks need to be understood. In the following sections we consider those risks and also which annuity or other product might be more suitable for you.

We also consider what have been christened third way products, or flexible annuities.

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