Income drawdown

Pension holders can take an income from their pension between the ages of 55 and 74, provided they have enough funds in their pot.

Upon retirement, 25% can be taken as a tax free lump sum and the remainder used to provide an annual or monthly income, which is subject to income tax.

This can be done by purchasing an annuity as a form of secured income from an insurance company, or through income drawdown.

What is income drawdown?

Income drawdown, also known as an unsecured pension (USP) or pension fund withdrawal, is where the remainder of the pension fund (savings minus 25% withdrawn as tax free lump sum) is left invested and used to provide an income from the pension.

New income drawdown rules were introduced in April 2011. One of the major advantages of income drawdown is that it allows you greater flexibility. Unlike an annuity where the income is set, investors can choose how much income to take.

In a capped drawdown scheme, there is no minimum amount of income that must be drawn, no matter how old you are. So if you prefer, you don't have to take any of that income at all.

The maximum income that can be drawn is 100% of the single life annuity that someone of the same sex and age could purchase based on the government actuary's department (GAD) rates. Before 2011, the maximum income was 120% of this limit.

You can also choose to stop income drawdown at any time and buy an annuity instead.

If you die during income drawdown, the remainder of your pension fund can be passed on to your beneficiaries (with a tax charge). The remaining fund can be passed on as annuities or as income from the fund. Alternatively, it can be taken as a lump sum but will be taxed at 55%.

With a flexible drawdown scheme, you can make as many withdrawals as you like. However, you will need to declare that you are already receiving a secure pension income of at least £20,000 a year (from a company pension/annuity/or state pension) and are no longer saving into a pension.

You should bear in mind, however, that if you stay invested and investment returns are poor, the value of your pension fund may fall. As a result, you will have a lower income to take and you will have less to buy an annuity with.

What's more, if annuity rates fall while you've stayed invested, when you do come to buy an annuity, the rate you receive could be far lower.

You also need to consider charges as there will be investment management charges for your investments and administration charges for your drawdown plan.

You therefore need to consider income drawdown carefully.