What is income drawdown?
'Income drawdown' is one way that you can access the money you've saved up in your pension scheme. It allows you to leave your pension invested and 'draw down' some of the pot as taxable income.
What is income drawdown?
Income drawdown is a way of taking income from your pension fund while keeping it invested. This can be a flexible way of accessing your pension savings.
How does income drawdown work?
Some pension schemes allow you to take income drawdown. If yours doesn't, and you wish to take this option, you'll have to transfer your pension pot to a scheme that does allow it – either with your current provider (if they offer it), or another provider.
You can normally then take out a cash tax-free lump sum of up to 25% of the value of your fund. It's worth remembering, however, that if this is your only source of income in retirement, then the more you take out up-front, the less you are left with to provide an income over time.
The remaining fund stays invested and could potentially grow or fall in value depending on investment performance. You can then draw out taxable income directly from the fund.
You can take this as monthly, annual or ad-hoc payments, as and when you like – although there may be a cap on how much this can be. If you had a drawdown plan before April 2015, then there will be maximum limits on what you can withdraw. These limits were removed on any 'flexi-access' drawdown plans that became available after April 2015.
Is it right for me?
As ever, when you’re thinking about how you’re going to use the money you’ve saved for your retirement, you should weigh up the pros and cons that an investment option like this gives you. It could be right for you if:
- You’re not ready to make a final decision
Income drawdown lets you keep your options open without locking you in.
- You’d like an element of control and flexibility
As you can vary how much or how little income you can draw (unlike an annuity which is a fixed amount every month), you’ll have more of a say over how much income is paid.
- You’d like flexible options on death
When you die, your nominated dependant or beneficiary can choose from a number of options. They can take income, receive the full remaining value of your pension fund as a lump sum, purchase an annuity or opt for a combination of these. You do need to be careful with the rules around this though. Any benefits paid as a lump sum from someone who died after the age of 75 will be taxed at the beneficiary's marginal tax rate. This means that the amount of tax will be worked out based on how much total income your beneficiary receives that year – the same as how you are taxed when you are working.
- You are willing and able to take some investment risk
As the value of your invested money can go up or down, you need to understand your attitude to risk and how well you can cope with potential losses which may include a reduction in the level of income you take, and/or the total exhaustion of your fund.
Where can I compare this product to other options?
Our Drawdown Risk Calculator will help you to compare the income that you could receive from an annuity, with the same level of income taken with income drawdown. It will base the response on whether your health is good, average or poor.
Once you've used the tool you can save and print out your results to refer to later on if you wish - making it easy to take away to discuss with friends, family, and a financial adviser, before you make a decision.
HUB Financial Solutions, which is part of the Just Group, offers an annuity comparison service that could help you make sense of your options.
You may also be interested in:
- Retirement income options: what can I do with my pension savings?
- Find out how life expectancy affects retirement income
- Read more about annuities - a guaranteed income for life
- What is investment risk and how will it affect me?
- Drawdown risk calculator: assess your risk of running out of money if you opt for income drawdown