Flexible-access drawdowns vs Annuities: Which is the best source of retirement income during the cost-of-living crisis?

The UK is undeniably in the grips of a cost-of-living crisis.

Inflation has reached its highest rate in thirty years at 7% and is expected to soar even higher throughout the year. Adding to this pressure is the soaring cost of energy prices and market volatility.

Consequently, individuals are seeing their budgets stretched beyond recognition – and UK retirees are no different. Without a guaranteed wage every month, those in retirement will likely be concerned about how they can afford to uphold their current lifestyle.

Fortunately, however, there are financial options available to help individuals weather the financial storm and uphold their financial health, even in retirement….

Guaranteed income

In times of crisis, many individuals crave certainty and stability. And for retirees, this could be offered in the form of an annuity.

An annuity is a source of retirement income, which can be bought with all, or a portion of one’s pension. It provides the retiree in question with a guaranteed income for the rest of their lives (or for an agreed period of time, in the case of a fixed-term annuity).

Annuity rates, which determine the amount of income an individual will receive in return for their pension, have also seen a modest increase in 2022, adding further to their appeal. This is mainly because interest rates have been gradually rising, reaching 0.75% in March this year. This means that retirees are likely to receive a more generous income in exchange for their pension.

It is certainly possible to understand why someone might consider taking out a fixed-term annuity in 2022. Given the financial uncertainty, the guarantee of a regular income for several years, until economic situation begins to settle, would certainly offer reassurances to retirees.

That said, an annuity certainly has some drawbacks… 

Freedom and flexibility

One of the key issues with annuities is their inflexibility. Once an individual agrees to receive a regular income at a certain annuity rate, they are locked in until their contract with their annuity provider ends. Their income will not be impacted by any positive market movements or further increased interest rates. Additionally, the proportion of an individual’s pension has no further opportunity to grow once it is used to purchase an annuity – once it’s gone, it’s gone.

Accordingly, some retirees might find their financial situation is better suited to a flexible-access drawdown. This product gives retirees the freedom to decide exactly how much income they want to receive at any given time. So, if they are worried about draining their pension pot too quickly, they can reduce the income they receive and increase it just a few months later.

It also allows retirees to continue growing their pension pot, even throughout retirement. This is because the proportion of the pension they do not withdraw remains invested within their pension fund, so it can continue to grow over time.

Of course, this can leave one’s retirement savings vulnerable to market fluctuations – and this can admittedly be unnerving for some people. However, it also means that their savings will benefit from positive market changes, which leaves scope for their pot to grow alongside the UK’s economic recovery.

Annuities or drawdowns? 

Of course, this begs the question: which retirement income option should retirees choose: Annuities of flexible-access drawdowns?

The answer is not clear-cut. The right option will depend on a variety of factors, including an individual’s financial situation, retirement goals and their risk appetite.

Of course, there is no one-size-fits-all retirement strategy. And as such, retirees should seek independent financial advice before making a decision. Indeed, our team of qualified advisers at My Pension Expert, have the knowledge and expertise to analyse an individual’s unique set of circumstances and make tailored recommendations to help them secure the best retirement outcome possible. For some, this could mean purchasing an annuity, or for others, it could mean entering a flexible-access drawdown.

These are uncertain times. Luckily, however, there are financial options to help retirees maintain financial security – the key is to seek advice before making a financial decision. In doing so, people will have the peace of mind that their finances are under control, despite this challenging economic situation.