Income Drawdown

What is Income Drawdown?

Income drawdown (also called pension fund withdrawal) is alternative to taking a pension annuity when you retire from a pension. Many people do not realise it, but when they retire from a pension scheme, they do not necessarily have to immediately take their income in the form of a pension annuity.

The main purpose of income drawdown is to defer the purchase of a pension annuity, especially while annuity rates are low.

An income drawdown scheme also allows the postponement of awkward decisions, such as whether to provide extra benefits for the spouse under an annuity.

Income drawdown allows you to retain control over the investment of your pension fund, until an annuity is purchased (by age 75). This is one of the main disadvantages of an annuity - in that once it is bought, normally all investment decisions are lost.

An attractive feature of income drawdown is that if a client dies before taking an annuity, they can leave the fund to their family (after tax). This could not happen under an annuity.

Income drawdown is available under personal pension plans (but not retirement annuity plans) and under occupations pension schemes (although generally this route is inferior to income drawdown under personal pension plans, and should only be considered if a transfer to a personal pension cannot be arranged).

Those considering Income drawdown should also look at phased retirement as an option.

The procedure under income drawdown.

When a policyholder decides to take out an income drawdown plan, he may transfer to another pension provider. At this point he will take up to the maximum tax free cash from the scheme (up to 25% of the fund). Following this, he must take income between certain levels set by the government actuary's department.

It is this income flexibility which is one of the most attractive features of income drawdown. Within the set limits you may choose the level of income each year. Obviously there is a risk associated with this, in that a careful watch must be kept on the underlying funds so that too much income is not taken, and the funds are not eroded too much.

Also, there are extra charges associated with income drawdown, since it is a specialised product. For this reason, there must be relatively high growth in the funds for the contract to beat the levels of income provided by a pension annuity. With this comes added risk. However, for many people, the added flexibility of income drawdown is more worthwhile. Overall, income drawdown should only be considered for those clients that have the funds to take out a plan, and are also prepared to take the risks.

Overall, income drawdown is a very complicated product, and should only be considered after receiving advice.

To speak to us about income drawdown schemes please contact us.