Many people buy annuities once they have retired. However, for reasons such as poor life expectancy , low annuity rates and the fact they do not require the full annuity income sometimes push people to look at the annuity alternatives.
Here are some basic details about the annuity alternatives.
Income drawdown is an annuity alternative where you defer buying an annuity (pension) and draw an income, within the limits set by the Government Actuary’s Department, directly from the fund in the meantime. Up to 25% of the fund can be taken as a tax-free lump sum before your 75th birthday. Unlike an annuity pension can be taken between a maximum limit, 100% of GAD and a minimum limit which is nil. You also have the freedom to stop income drawdown at any time and purchase an annuity.
Alternatively Secured Pension
At age 75 the investor needs to purchase an annuity or go into Alternatively Secured Pension (ASP). This is a more limited than income drawdown as it restricts maximum withdrawal to 90% of GAD and now, you have to take a minimum withdrawal of 55% GAD per annum. You also have to review the retirement fund annually and the review is based on GAD factors of a 75 year old even if the investor is over 75 years of age.
Dependant’s can be paid as:
- Buy an annuity
- An unsecured pension if the dependant’s are under age 75
- An Alternatively Secured Pension if the dependant is over age 75
There are some risks associated with income drawdown and alternatively secured pension such as investment volatility, mortality cross-subsidies and levels of withdrawal.
If you don’t want to buy an annuity, then you can consider the annuity alternatives. But this is a complex area and you really need to take financial advice.