Retirement is not just one decision
When you retire, you may have choices about what to do with the pension value that remains after any lump sum. Two common options are an Approved Retirement Fund, known as an ARF, and an annuity. They work very differently.
An ARF keeps your pension money invested after retirement. You can draw income from it, subject to the rules that apply, while the remaining fund continues to rise and fall with markets. This gives flexibility, but it also means investment risk and withdrawal decisions remain important.
An annuity is different. With an annuity, you use pension money to buy a guaranteed income, often for life. This can provide certainty and remove some investment risk, but it usually gives less flexibility once set up. The income level can depend on age, interest rates, health, options chosen and market conditions when purchased.
Neither option is automatically better. An ARF may suit someone who values flexibility and is comfortable managing investment and withdrawal risk. An annuity may suit someone who values guaranteed income and wants less uncertainty. Some people may use a mix, depending on their needs.
What matters most
The right retirement option depends on income needs, health, dependants, other assets and comfort with risk.
- An ARF offers flexibility but keeps investment risk.
- An annuity offers income certainty but usually less flexibility.
- Withdrawals from an ARF need careful planning.
- Inflation can affect the real value of retirement income.
- Professional advice is important before making an irreversible choice.