Income Drawdown – The Pros and Cons
What is Income Drawdown and who is it for?
Also known as an ‘unsecured pension’, Income drawdown is effectively a form of annuity, though it almost acts as an annuity alternative, since they are exclusively for those with a larger than average pension pot. This option is applicable to:
• Occupational Money Purchase Schemes
• Personal Pension Schemes
• Stakeholder Pension Schemes
It allows you the luxury of keeping your pension fund wholly invested with the added benefit of still being able to withdraw a portion, as an income. The available amount can be usually up to 120% of the yearly income you would have initially received, had the money originally been utilised to purchase an annuity.
Your pension administrator or employer is able to inform you as to whether you are eligible for income drawdown, but realistically for this to be an open option to you, a pension fund of around £100,000 is normally required.
• Allows income withdrawal from your pension fund, without needing to rush towards annuity purchase commitments right away. You are able to sit back and wait for extremely favourable annuity rates to come along.
• You are able to acquire the entire amount immediately if you so wish, but this lump sum will be subject to tax deductions. Otherwise you are able to retract your income on a monthly basis.
• The income available to you does vary year on year, although the amount has to remain within set boundaries.
• Income drawdown allows you to obtain 25% of your pension as a tax-free lump sum when you first establish a contract. An income does not necessarily have to be withdrawn immediately, not to mention that it is also very flexible.
There are a number of risks associated with income drawdown investments. For example if someone is withdrawing from their income drawdown contract and the stock-market falls, their pension savings could dissolve rather quickly. As a rule you should keep withdrawals to the naturally prosperous areas of your investments, such as cash interest, property income or equity dividends.
If the economic recession scares you a little, you can always detach your pension savings from income drawdown, and simply purchase an annuity.
Income drawdown policies do differ between providers, so please check out any details you might be unsure of.
Simply put, income drawdown allows you:
1) Money for early retirement
2) Funds that can be used for investment
3) A reliable source of tax-free benefit
4) Flexible access to your savings.
Thinking of Retiring Soon? Have a look at our Annuity Comparison Table
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