What is Income Drawdown?
Pension Drawdown - an Alternative to buying an annuity
Income drawdown is also called pension drawdown. It is an alternative to buying a lifetime annuity at retirement. It is also called unsecured pension Income drawdown allows you to avoid to a buying an annuity.
On retirement clients take a tax-free lump sum form their pension fund and use what is left to purchase an annuity from a life insurance company. This provides a pension income for the rest of your life.
Clients opting for income drawdown will normally take the tax free cash (pension commencement lump sum) from their pension fund. Income drawdown arrangements then allow you to start taking an income from your pension fund. During this time pension fund remains invested.
Complicated rules govern how income drawdown arrangements are implemented. Income drawdown schmes are no divided in to two main types.
1. Capped Income Drawdown.
2. Flexible Income Drawdown.
Capped Income Drawdown - There is an upper limit to the income you can draw. This similar to 100% of the amount you would get from a single-life lifetime annuity. However, there is no minimum. This income is subject to tax.
It is important to remember that you will be taking an income from a fund that is invested in assets such as the stock market, property, or gilts. The value of the fund or the income levels available from it cannot be guaranteed and may go down as well as up.
Flexible Income drawdown Individuals with a ‘lifetime income’ of at least £20,000 are allowed to take unlimited withdrawals from their drawdown funds, as long as the scheme permits it..
Sources of income which count towards the new flexible drawdown include guaranteed lifetime income are state pensions, defined benefit schemes, scheme pensions and lifetime annuities .
Advantages of Income drawdown
Income drawdown arrangements offer the following benefits –
You can put off purchasing an annuity. If fund performance is strong the fund may grow as well as providing an income. If you or your partner are in poor health you can us income drawdown to put off purchasing annuity. If you die before your spouse, the fund can be left to your partner and any dependants. They will have a range options. They could take some or all of the fund as a lump sum. This is option is taxable (currently @ 55%). Alternatively it is possible to carry on taking an income, or buy an annuity with the whole fund.
Disadvantages of Income drawdown
When you eventually buy an annuity rates may be worse than those available at the start of the drawdown arrangement. Your pension fund may not grow as well as we have hoped. Your fund after withdrawals may be lower than at the star of the drawdown arrangement. This is very possible if high levels of withdrawal are made.
Who are suited to income drawdown arrangements?
We have added this list to help you understand the issues better. However, this list is not exhaustive and you should call us for specialist advice.
In conclusion
This is a very simple outline of Income Drawdown. Income drawdown plans are complex. We urge you to take specialist advice. They are not suitable for everyone, and are usually unsuitable if you have no other income or assets to fall back on, or if you have a smaller pension fund. Taking one out also depends on the amount of risk you are prepared to bear. For the right client, however, they can offer useful benefits
