Income drawdown is an alternative to buying an annuity with your pension fund. As annuity rates have become increasingly poor over the last few years, many people have opted to receive a retirement income using this method. This way the fund remains invested if you wish and would therefore benefit from growth over time, offering a potentially increased income.
When it comes to pensions, income drawdown is becoming a popular choice and flexible drawdown falls within this. Income drawdown is usually capped so a limit is set to what can be annually withdrawn from a fund and this tends to be a similar amount to what would be received from an annuity. However, with a flexible drawdown no cap is in place so the whole pension could be withdrawn in one go.
In reality, this may not be the best option as there is a tax liability on pension income, but everybody has different needs and it is a personal choice. As you are in control of the pension fund, you can choose how much to withdraw and when. You must, however, be able to declare that you already receive a secure pension income per annum of at least 20,000 and are no longer contributing to pensions.
A secured pension income is defined as a company pension you receive from the UK or overseas, an annuity received from the UK or overseas or a state pension paid from either the UK or overseas. Secured pension income is calculated on the gross annual pension received (i.e. before any tax deduction).
Because investments within your pension are in danger of performing badly, it is riskier to leave funds in the pension and use an income drawdown than it would be to buy a lifetime annuity paying a guaranteed figure. Even if the value of the fund recovers, there may be a period when you have to reduce the amount of income you can withdraw and this needs to be considered.
There are also more costs involved in income drawdown. As your pension fund remains invested with the pension provider, they will still be charging investment management fees. It will also be necessary to regularly review the fund’s value to make sure that you are not running down the savings too quickly. In general, any kind of income drawdown is usually only suitable for people with large pension funds of around 250,000 or more or those who have another more stable source of income to use if necessary.
Income drawdown is not offered by all pension providers. Even in cases where the rules do not restrict a pension-fund holder, the individual provider may have their own rules in place. You should therefore always check the terms and conditions carefully of any scheme that interests you. It is a complex decision to ascertain whether any type of income drawdown is right for you and independent financial advice should always be sought.
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