Your Retirement Fund: What Are Alternatives to Annuities?

What are the alternatives to annuities? Find out the best ways to plan for your retirement fund.

The pension funds that an individual accumulates can be used to purchase an annuity from the pension plan provider or similar company. This typically happens during the early stages of retirement. For many people, this is their retirement fund.

People with annuities receive a fixed sum of money at regular intervals, either for the rest of their lives or a set term. That may sound fair, but annuities can have drawbacks. This is especially true for retirees with large pension funds who take good care of their health.

The longer your annuity provider expects you to live, the lower the value of the payments you receive will be. Moreover, annuity rates can also suffer if providers’ investments perform badly.

With that in mind, it’s worth looking at key alternatives to buying an annuity.

Retirement fund: what are alternatives to annuities?

The government reformed the pensions system in 2015, making it more flexible. As a result, exchanging pension pots for annuities is no longer the only real option for many people moving into retirement. You might be better off choosing a different retirement funding option and/or waiting several years before signing on the dotted line for an annuity.

1. Phased retirement

Giving up work completely and buying an annuity are both major steps. If you’d prefer to streamline your move into retirement, a phased retirement plan (also called ‘staggered vesting’) can be a good choice.

You reduce your working hours in stages, compensating for your reduction in earnings each time by withdrawing a portion of your pension funds.

Phased retirement is empowering if you’re worried about how your financial needs may change over time. The amount you withdraw from your pension pot at each stage reflects your circumstances at the time rather than a fixed payment rate. That’s because your funds are divided into segments, and you choose how many of them to withdraw each time.

2. Deferred purchase

If you pursue phased retirement or can support yourself for several years after retiring without needing an income from pension funds, consider deferred purchase.

That means postponing the purchase of an annuity until you reach an advanced age. At this point annuity providers are likely to offer you more attractive rates than you’d get now.

3. Income drawdown

If the idea of handing over your pension funds to an annuity provider troubles you, an income drawdown scheme is likely to have more appeal.

Essentially, you remain in charge of your money while also being able to draw a regular income from it. Alongside or instead of that regular income, you have the ability to make occasional “lump sum” withdrawals.

A major advantage of income drawdown is that you continue to have a say in how your pension funds are invested. If you make sound investment decisions, your pension pot could well increase in size. You may also be able to leave the core capital untouched and just make withdrawals from the money generated by your investments (the “natural yield”).

Plan carefully, invest wisely and you’ll stand a good chance of living comfortably. Moreover, income drawdown doesn’t prevent you from buying an annuity at a later date.

4. Trivial commutation

Don’t be misled by the complicated name. Trivial commutation is actually straightforward.

If your pension savings are equivalent to £30,000 or less, they won’t lead to a healthy, long-term retirement fund via an annuity. Provided you’re at least 55 (or retiring earlier due to poor health), you can convert them into a one-off payment to use as your retirement income instead.

Choosing the best option for your needs

It’s important to consider the pros and cons of all the retirement funding options available to you. Alternatives to annuities don’t guarantee long-term sources of retirement income but they do boast greater freedom and flexibility. Your chosen option should also reflect the state of your health, level of wealth and attitude to risk.

As a first step to planning for your retirement, download our helpful guide using the button below. It’s free, and it tells you everything you need to know to make sure you’re comfortable later on in life.

Expert Wealth Management provides independent financial advice tailored to the individual needs and circumstances of every client. Receive personalised pension investment advice. This will enable you to plan realistically for your big dreams and practical needs of retirement.

Start planning for your retirement – find out more



About the Author

Jon is a highly qualified and experienced Chartered Financial Planner and Certified Financial Planner with over 27 years’ experience. He loves working with clients who are passionate about getting the most out of life and feels his job is to support them living life to the fullest. Read more from Jonathan...
This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
I wanted to say a big thank you to Jonathan on behalf of the family, and especially from my Dad, who would have been so very pleased with the final outcome of the estate. This year should see the family able to draw a line under the estate and to continue life with the loving memories of our parents. A sincere thank you. We could not have done it without you. A.B. (Abingdon)

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