What is income drawdown – how does it work?
Income drawdown lets you take a regular income from your pension savings whilst leaving your money invested. You have the flexibility to change the amount of income you can take each year, or indeed take no income, but as with all pensions, those withdrawals will be treated as income so income tax may be payable.
There are two different types of drawdown – capped drawdown and flexi-access drawdown:
- Capped drawdown (Pre-April 2015) – there is a maximum limit placed on how much income can be withdrawn each year based on calculations made by the Government Actuary's Department (GAD).
- Flexi-access drawdown (Post-April 2015) – there are no restrictions on how much you can take out.
Why could income drawdown be a good idea?
Income drawdown may be a good idea if:
- You don't want to make any once-and-for-all decisions just yet, and/or
- You decide that flexibility and control over your pension savings are important to you, and/or
- You want to keep your pension savings invested with the aim of increasing their value, and/or
- You're willing and able to take investment risk with your pension savings.
You can also use income drawdown in combination with an annuity as this can give you a "foot in both camps" – a secure income to cover your essential spending as well as an element of control and flexibility over the rest of your pension savings.
Are there any drawbacks with income drawdown?
With income drawdown you need to remember that when the money you have saved is gone, it's gone - and you could run out of money. The challenge is knowing how long you will need your savings and the income it generates, to last for. Actuaries and insurance companies talk about an individual's 'longevity' that help them to calculate this.
What other options may I have?
Much will depend on the type of pension you have and what’s being offered to you by your pension provider, but we suggest looking at guaranteed income for life solution and thinking carefully about taking lump sums. To find out more about income drawdown, why not look at the income drawdown section in financial products.
Our sister company, Just Retirement Solutions, offers an annuity comparison service that could help you make sense of your options.