What is income drawdown?
When you are approaching retirement and want to start taking your pension income most people will assume they will buy an annuity which will provide them with a fixed income for the rest of their life.
The problem with an annuity is that once the annuity has been purchased that’s it, no changes can be made and there is very little flexibility within the product. With an income drawdown plan you have more control over what happens to the funds and what income you can take.
Varying your income
With an income drawdown plan you can vary the level of income you receive each year. So if you need an income one year, but don’t need the same level of income the next you can increase or decrease the amount you take out.
The amount of income you can take depends on the value of your fund and the rates set by the Government Actuary’s Department; these are known as GAD rates. GAD rates are calculated in line with government gilts and set the maximum amount of income anyone can take from an income drawdown plan. GAD rates are broadly in line with the equivalent level of income from a single life annuity the fund could purchase.
Your money remains invested
Income drawdown plans offer more flexibility than an annuity, but are more risky than an annuity because the money in your income drawdown plan remains invested and is therefore liable to fluctuations in the stock market. The income you take is also coming directly out of the funds and every penny you draw out is therefore reducing the value of your fund. Your income drawdown plan must therefore be reviewed regularly to minimise the risk that you take out more than your fund is growing by. Income drawdown plans and the level of income you are taking must be reviewed at least every 3 years and every year after you reach 75.
You can still change to an annuity at any time
As well as giving you the flexibility to increase or decrease your income each year an income drawdown plan can be used to purchase an annuity at any time. There are no minimum terms for an income drawdown plan and there is no requirement to buy an annuity with an income drawdown plan. So as long as you are happy with the performance and the income you get from your income drawdown plan you can keep the money invested for as long as you like.
Provide an income for your partner
Unlike an annuity an income drawdown plan remains your investment and when you die the funds can continue to provide an income for your partner from the plan, can be used to purchase an annuity for your partner or can form part of your estate (subject to a 55% tax charge).
Not suitable for everyone
Income drawdown plans are more complex and more risky than annuities and are therefore not suitable for everyone. The value of your fund is dependent on the level of income you take and on fund performance and it is possible that your income could decrease considerably if funds under perform or you take out too much income. If you are considering an income drawdown plan you should always take professional financial advice. Albion Pensions offer a FREE pension review service and can offer you advice and assistance on whether or not an income drawdown plan is suitable for you. Simply complete the form on the right and we will review your pension arrangements FREE and tell you what your options are.
Take 25% of your fund as a tax free cash lump sum
As with all pension arrangements you can take a lump sum of up to 25% of your pension fund tax free at anytime after the age of 55. So you can take your tax free cash lump sum and then put the remainder of your fund into an income drawdown plan.