Income Drawdown- What is it and how does it work?
Income drawdown is often referred to as an ‘Unsecured Pension.’ Unsecured pensions allow you to draw an income from your pension fund whilst leaving the rest of the money invested. This allows you to put off purchasing an annuity until much later on in retirement. This gives you an opportunity to access some of your hard earned pension fund, but to leave the rest of it invested choosing to buy an annuity, hopefully at a better rate, in the future.
Consult an advisor
You must consult an Independent Financial Advisor who will help you decide whether income drawdown is the right plan for you. You have the option to take up to 25% tax free once you reach pension age. It’s worth noting that there is a maximum (and minimum) level of income you can take over the first 5 years, based on the invested fund and HM Revenue & Customs rules.
The best way to decide whether this sort of plan is suitable for you is to look at the factors involved. Firstly, if you want your income to vary over time to reflect changes in your circumstances, this may work for you. Secondly, if you want your pension fund to continue to benefit from potential growth whilst still being able to draw an income from it, this is the probably the best option for you. It is worth noting you have to be prepared to accept the risk that its value may fail rather than rise.
The main drawbacks of this type of plan are that, compared to other conventional annuity routes, income drawdown offers a much higher risk. Secondly, annuity rates do vary a great amount over time so if you were to wait until before buying an annuity with your fund you will be stuck with whatever rates are available at the time.
One of the biggest drawbacks is that your income is not guaranteed, so your invested fund may not perform as well as you had expected meaning the benefits may not be as high as anticipated.
Charges may also be a lot higher than what you would pay for a conventional annuity rate and the withdrawals you make to provide you with an income reduce your remaining retirement fund and may erode the capital value of the remaining fund already invested.
However, this type of plan allows you to delay buying an annuity whilst still receiving some sort of income in the meantime. If annuity rates are suffering at the time you are looking to cash in your pension you can use this scheme for a few years until they improve. Income Drawdown also gives you the flexibility of how much you wish to withdraw as an income and when you take it. You can chose to pass your pension fund on to your dependants if you die whilst also offering you a wider choice of where to invest your money.
This is an option you should consider, but before making any sort of decision you should do your research and consult with an IFA.
Thinking of Retiring Soon? Have a look at our Annuity Comparison Table