If you are approaching retirement you will have a number of financial options available to you in terms of retirement income. One of which will of course be a pension annuity, but with annuity rates being so volatile as they are, coupled with evidence that IFA’s are becoming less interested in annuities in general, alternatives retirement options are gaining more popularity. The alternative to an annuity is known within the industry as Income Drawdown or an Unsecured Pension.
There are several advantages to an unsecured pension as well as many disadvantages. It really depends on your own financial circumstances and the level of risk you are willing to bare.
The first main element to be aware of is that of investment risk. Unlike with a conventional or standard annuity, your income level from an unsecured pension changes in line with the performance of the various investments which your income is tied to. The advantage here is that if investments perform favourably, your income will be higher than if you had just opted for a standard fixed annuity. However if the investments perform badly, then your income will be lower. In short you take a punt on the investment market and you could win or lose. Of course if you choose to invest in high risk funds, your reward could be substantial but if you choose lower risk funds, your chances of earning more than you would otherwise earn under an annuity are much reduced.
The other risk is that if you decided that at a certain point in the future you want to buy an annuity, rates might be lower than in the past when you opted for an unsecured pension instead. An unsecured pension is generally an option considered best for those with large pension pots, for example, those in excess of £100,000. They are not recommend for anyone whose minimum income requirement can be jeopardized by poor investment returns. So if your chosen standard of living requires your income to be at £X amount per year and an unsecured pension on a bad year only yields £Y, then this option is not for you. However, if you are financially secure and can afford to take the risk, this could be the best way to significantly boost your retirement income.
The other thing to consider is that the income you can withdraw from an ASP is reviewed by the government every five years to check you don’t breach the limits set down my the HMRC, which could result in your income falling in the future. Finally also consider that the administration of an ASP is much higher compared with the purchase of an annuity. You may also have to factor in ongoing Independent Financial Advice, which itself can be a financial burden. This is why ASP tend to suit those with the largest pension pots.
