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Capped Drawdown Pension

Pension fund withdrawal, drawdown, income drawdown, income withdrawal, pension drawdown these are all different titles given to the same product. It is a way to take your pension benefits without the purchase of an annuity.

Pension Drawdown Basics

Pension drawdown contracts are really a very simple concept. As with an annuity, a tax-free lump sum can be taken from the pension but instead of purchasing a fixed income with the accrued pension fund, you leave it invested and withdraw money as required.

There are two ways that this drawdown can be set up, as a Capped Drawdown or a Flexible Drawdown. Here is an overview of the Capped Drawdown.

Capped Drawdown

A capped drawdown pension is a method of taking a pension benefit without having to buy an annuity and is a continuation of an unsecured pension plan.

The concept of capped drawdown contracts is simple. As with an annuity, the option to take a tax-free lump sum exists but rather than purchasing a fixed income with the funds remaining, you withdraw cash from the fund. There isn’t an upper age limit and you can usually start the contract at 55. You do not have to take an income, but if you do the maximum you can annually withdraw will be approximately the same as a level annuity. The upper limit is assessed every three years for under 75s and annually for those above.

In the unfortunate event of death, your dependents can continue to withdraw income from the remaining funds, choose to buy an annuity or have the fund paid out less tax. Alternatively, the fund can be paid to a nominated charity and this would then not be taxed.

The Advantages of Capped Drawdown

There are a number of advantages to capped drawdowns. The income amount can be varied subject to the maximum cap, or a tax-free lump sum can be taken with no income paid. You can avoid buying an annuity, leaving the funds invested to grow and allowing future income to increase. The fund is easily passed on should death occur.

The Disadvantages of Capped Drawdowns

Annuity rates can go down, so if you decide later to purchase one with the funds remaining you may lose out. The value of your fund could fall and it therefore needs constant monitoring. The income cannot be guaranteed and could fall and the charges will be higher than those for an annuity.

As with any investment, it is advisable to seek professional advice from a qualified Independent Financial Advisor before making any decisions.

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