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Income Drawdown

Income drawdown offers you an alternative to purchasing an annuity for retirement. Also referred to as an unsecured pension, income drawdown allows you to leave your pension invested and only take a portion of the funds each year as income. This has the advantage of allowing you to earn an income from the money you have accumulated in your retirement fund and retire fully or to semi-retire and supplement your reduced income.

An income drawdown allows UK citizens to make withdrawals from their pension fund whilst the balance of the fund remain invested, allowing financial growth without the burden of income and capital-gains tax. It is important to remember that although this is an increasingly popular way to prepare for retirement, the value of your investment can fluctuate and there is no guarantee that you will receive a high return.

Understanding Income Drawdown

There are several factors you will need to consider when deciding whether income drawdown will be suitable for you. The biggest factor for consideration is the high risk of the investment, as market performance fluctuates positively and negatively on an ongoing basis. This fluctuation means that your income could be subject to dramatic changes and could increase by a significant amount or diminish drastically.

Income drawdown requires a level of financial acumen. If you are investing in your own pension fund and withdrawing funds on a regular basis, it is important that you are comfortable with the management of your own investment. If you feel that a professional opinion would be preferable, you will need to take into account the extra costs incurred when relying on someone else to manage your money.

Pros and Cons of Income Drawdown

The pros and cons of income drawdown could be debated endlessly and it is important to remember that every investment is a risk. It is just the size of the risk that differs. Income drawdown can be risky and your capital investment may shrink or be reduced to nothing if the market collapses. You could also deplete your investment by excessive withdrawals which then will reduce your income in the future. However this can be avoided with good financial management.

In the event of your death, an advantage of income drawdown is that your beneficiaries will still receive any money remaining after a tax of 55%. However, if you live longer than expected and you have depleted your investment by utilising the income drawdown facility, you do not have the same security as that offered by an annuity.

If you are concerned about the performance of an income drawdown investment, you can always purchase an annuity at a later date or opt for both. You could purchase an annuity and leave some of your pension invested in order to withdraw an annual income and enjoy the benefits of an income drawdown facility. This gives you the best of both types of investment and ensures you have security for your retirement.

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