I take £3k a year from my £50k pension pot – should I buy an annuity? Steve Webb replies

I retired in 2021 and moved one of my pension funds to a large company through a financial advisor.

After collecting my 25 per cent tax-free lump sum, I was left with just under £50,000.

From this, I agreed to take £3,000 per year for five years, starting in March 2022.

Now I’m wondering if I would be better off if I stopped the current withdrawal (still three years away) and took the remaining amount as an annuity, given that interest rates are much higher now and therefore I assume annuities will have improved as well .

Would I have to use the same company for the annuity that my pension fund currently has or can I shop around and will there be a charge for the transfer?

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Steve Webb responds: In a world where many people enter retirement with very small pension pots, by far the most common option is to cash in the whole lot, taking a tax-free lump sum and paying tax on the rest.

But, over time, more people will be in the same position as you, having accumulated a more significant pot.

In this case, cashing out the entire lot may not be the best option as you could face a large tax bill and miss out on the opportunity to grow your pot even more.

The question then arises as to how your money should be invested after retirement.

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Low rules set by the Financial Conduct AuthorityYour pension provider has to ask you about your plans for the next five years and will then make decisions about how to invest your money based on your answer.

This process is known as putting you on an “investment track.”

According to the rules, you have four options to choose from regarding your plans:

A. I have no plans to touch my money in the next five years;

B. I plan to use my money to establish a guaranteed income (annuity) in the next five years;

C. I plan to start taking my money as long-term income in the next five years;

D. I plan to withdraw all my money in the next five years.

As you can imagine, the best way to invest your money can be quite different if you don’t need to touch your money for five years than if you’re going to withdraw it all.

The idea of ​​this process is to allow your pension provider to set things up in a way that best suits your intentions at retirement.

However, a very important point to keep in mind is that you are not bound by the answer you give and can change your mind at any time.

You can also vary the amount you withdraw, but always check the rules first in case there are limits or costs for having more flexibility.

In your case, it sounds as if in retirement you took your lump sum tax-free but decided to leave the rest of your fund to invest, collecting a relatively modest sum each year (option C in the list above).

But you are completely free to do something different with your retirement fund, either because your circumstances have changed or because market conditions have changed.

In terms of using your fund to purchase an annuity, the normal process would be for you to be offered what is called an “Open Market Option.”

In simple terms, this means that you can take your money to any annuity provider and therefore you should shop around to find the best rate you can get based on your individual circumstances.

I would be surprised if your retirement provider charges you for deciding to come out of retirement but of course you should check with them before making any decisions.

To your broader point, you are absolutely right that annuity rates are now generally much higher than when you first took your pension a couple of years ago. But the rate of return she can get on the money invested in her pension is also likely to be higher.

If you continue to invest, you will assume some investment risk, but you will potentially benefit from growth in the value of your fund.

On the other hand, if you buy an annuity, you’ll enjoy the certainty of a guaranteed income, but you’ll likely get a lower overall return.

The correct answer will depend on your individual circumstances and how comfortable you are with the uncertainty of investing.

I’ve covered some of the pros and cons of buying an annuity in my previous column here: What is the best age to use my £220,000 pension to buy an annuity?