How do I choose between reducing the pension and an annuity?

Retirement decision: how do I choose between reducing the pension and an annuity? (Image Stock)

I am 34 years old, I make regular contributions to a defined contribution company pension, and until recently I ignored it.

I connected to take a look at the new provider portal and I realized that I had a new range of options that now comes down to choosing if I think I will want to take an annuity or a retirement pension.

What it does not tell me is how this choice affects what I could get when I reached magical age. Which is the least "risky"? If I say drawdown, but then I decide annuity, does that put me in a worse situation than if I gave it back?

Retirement decision: how do I choose between reducing the pension and an annuity? (Image Stock)

Retirement decision: how do I choose between reducing the pension and an annuity? (Image Stock)

Should I try to divide the pots? Do I have a couple transferred from other places? What happens if the reduction does not exist in the future? What happens if a new magic pension option appears?

I am not looking for the differences between retirement options, more about the investments that will be made now. Help?


Steve Webb responds: The choice that now has arises from the "pension freedoms" that were introduced in April 2015.

Until then, the vast majority of people who accumulated a pot of money in a pension used it at the time of retirement to buy a lifetime income or a "life annuity".

Steve Webb: Find out how to ask the former Minister of Pensions about his retirement savings in the box below

Steve Webb: Find out how to ask the former Minister of Pensions about his retirement savings in the box below

Steve Webb: Find out how to ask the former Minister of Pensions about his retirement savings in the box below

After the introduction of pension freedoms, savers no longer have to use their pension fund to buy an annuity.

Now, they have the option of taking everything out at once (although they potentially face a large tax bill if they do) and spend it as they wish, they can leave the money to continue investing and turn to it when they want it through retirement, or they can still buy an annuity.

How could this affect your investments?

In the past, your pension company could assume that most people would buy an annuity at retirement age.

As you get older, you will gradually change your asset investments such as stocks that are riskier but will generally generate higher returns and things like government bonds that will yield less but are less volatile.

This process was known as "lifestyle" and, in general, began 10 years before someone's retirement age.

The idea was that people who are about to buy a lifetime income with their pension boat do not want to discover that the value of their boat has changed drastically in the months and years before they retire.

By changing your pension investment in this way, the intention is to make it more predictable, especially as you approach retirement.

From retirement freedom, most people no longer buy a life annuity when they reach retirement age, which gives pension companies a dilemma.

What is a defined contribution pension?

Most employers in the private sector now offer defined-contribution pensions.

They take contributions from both the employer and the employee and invest them to provide a money well at the time of retirement, but the worker assumes all the risk of the investment.

They are more stingy and risky than defined traditional benefits, or the final salary, which provide a guaranteed income after retirement until you die. This is money

If most people continue to invest their well * after retirement, to continue to benefit from the growth of those investments, then it seems rather strange that the pension company has excluded it from their actions just before retiring.

In response to this, many pension companies have now changed the assumption they make about people's future plans. Most have now changed to assume that they will not buy an annuity, but instead will go to the reduction.

The practical consequence of this is that your pension will remain invested in assets with greater profitability but with greater risk for a longer time.

However, very few investments are absolutely true and even government bonds can go up and down in value.

How do you decide what to tell your pension provider?

As you already know, although the company assumes a whole for the membership of the plan in its entirety, you have the right to make a different choice.

If you know that you intend to buy a life annuity (or that is your most likely option), you can tell the plan and disconnect it from more profitable / higher risk assets much sooner.

If you really are not sure, you could, as suggested, & # 39; mix & match & # 39; with some of their pensions adopting one approach and the other.

For someone of your age, both options will probably look very similar for the next 10-15 years. Once people reach the age of 50, lifestyle would begin to have a significant impact on most schemes.

How do government bond markets work?

We cut out the jargon and explain how they affect your savings, pensions and investments. Read more here

Could the reduction of pensions be abolished?

You ask what would happen if the drawdown was no longer available in the future. While it is possible for a future government to make that change, pension freedoms have been so popular that it seems unlikely that the ability to shape their retirement income to meet their needs will be completely eliminated.

In the extreme case that the reduction was abolished and all were forced to buy an annuity, they would probably have a notice of a few years (since the necessary legislation was enacted).

This would allow your pension provider to start moving you to lower risk assets that would be a more natural advantage to buy an annuity with your pension pot.


Former Pension Minister Steve Webb is This Is Money & # 39; s Agony Uncle.

He is ready to answer your questions, whether he is still saving, in the process of quitting or juggling his finances upon retirement.

Since leaving the Department of Labor and Pensions after the May 2015 elections, Steve joined the pension firm Royal London as policy director.

If you would like to ask Steve a question about pensions, send an email to

Steve will do his best to respond to your message in a nearby column, but he will not be able to respond to all or communicate privately with readers. Nothing in your answers constitutes regulated financial advice. The published questions are sometimes edited for brevity or other reasons.

Include a daytime contact number with your message; this will be kept confidential and will not be used for commercial purposes.

If Steve can not answer your question, you can also contact The Pensions Advisory Service, a government-backed organization that provides free help to the public. TPAS can be found here and its number is 0800 011 3797.

Steve receives many questions about the state pensions and COPE forecasts: the equivalent of the pension contracted. If you write Steve about this topic, answer a typical reader question here. It includes links to several previous Steve columns on state pension and outsourcing forecasts, which could be useful.

If you have any questions about the state pensions supplements, Steve has written a guide that you can find here.

(function() {
var _fbq = window._fbq || (window._fbq = []);
if (!_fbq.loaded) {
var fbds = document.createElement(‘script’);
fbds.async = true;
fbds.src = “”;
var s = document.getElementsByTagName(‘script’)[0];
s.parentNode.insertBefore(fbds, s);
_fbq.loaded = true;
_fbq.push([‘addPixelId’, ‘1401367413466420’]);
window._fbq = window._fbq || [];
window._fbq.push([“track”, “PixelInitialized”, {}]);