What is an Income drawdown pension?

A drawdown pension is a flexible alternative to buying an annuity for those aged 55 and over. It allows you to take a tax free cash lump sum and/or an income from your pension whilst the remainder of the fund stays invested.

Income drawdown is another name for a drawdown pension.

One of the benefits of a drawdown pension is that you keep control of your investment and choose what level of pension income you wish within government actuarial department (GAD) limits.  From April 6th 2011, new Government retirement rules were introduced.

Why you may consider Income Drawdown:

You can take up to 25% of your Pension Fund Tax Free Now.

The remaining fund will remain invested.  You may elect to receive an income between zero and 100% of the Governments Actuary Department (GAD) limits.  This ensures you can benefit by setting your personal income level in the most tax efficient manner.

Annuity rates may be better in the future. 

When you purchase your annuity you become locked in at that annuity rate for the remainder of your pension. An income drawdown pension gives you the flexibility to buy an annuity when rates are more favourable.

Delaying purchasing an annuity may result in a better annuity rate

Your annuity rate is based on your life expectancy and the longer you defer purchasing an annuity the more your life expectancy decreases.  A reduced life expectancy may result in a better annuity rate.

Delaying buying an annuity can give your pension fund more time to grow

With a drawdown pension you can decide when to purchase your pension and have the flexibility to do so at a time that is right for you.  In addition, if you become ill whilst in income drawdown, you may wish to consider the option of purchasing an impaired/enhanced annuity with better terms.

Deferring buying an annuity

possible drawbacks:

• Annuity rates might not be better in the future
• Your life expectancy may be recalculated resulting in a lower annuity rate
• Poor investment performance could have a negative effect on the value of your pension fund.

It is worth taking the time to consider each option carefully and with the help of professional advice.
Deferring buying an annuity gives you the flexibility of making the decision to buy an annuity at a time that suits you.  In the meantime, a drawdown pension allows you to draw an income direct from your pension fund while the balance of your fund remains invested.

With a drawdown pension you can choose the amount of pension income that you want (subject to HMRC maximum limits).  Imagine that you decide to continue working.  You could initially draw a smaller income from your pension and gradually increase the amount until you decide to retire in full.

Alternatively you could just take the tax free cash lump sum and not draw any income from your pension until later.  However this option can be expensive and is not suitable for everyone, but the key to a drawdown pension is the level of flexibility that it offers.

Without a doubt some of the most important decisions you will make will be concerning your pension.  Learn more about the options available to you, and how to maximise them to your advantage by calling us today on 0141 764 0040.

Further reading:

Can you afford to spend 1/3 of your life in retirement?

3 reasons a deferred pension may mean more money

A pension or an ISA?

Retirement Options