Things to consider about income drawdown
With so many options to choose from for your retirement income it's important to get the right one for you. If you're considering income drawdown, it's important to ask yourself some searching questions.
How much income will I get from income drawdown?
You can choose how much income you take from income drawdown, but it's important to remember that the income is not guaranteed for life and your pension savings could run out. The amount of time your savings will last depends on a number of factors:
- The amount of money you have in your pension pot in the first place.
- How much you pay in fees for your retirement products.
- How often you draw an income and/or any lump sums – the more you take, the less you will have for future years.
- How well your investments perform.
It's also important to bear in mind that you don't know how long you'll live for. This is often referred to as 'longevity'. To find out more about the importance of longevity, take a look at this short film:
How often can I take my income?
You can usually choose to take income monthly, quarterly, half-yearly or yearly.
How much can I invest?
There's usually no upper limit to how much you can invest in a drawdown scheme. However, different providers have their own set minimum limits.
Why do people choose income drawdown?
- It can be a more flexible way to access your pension funds than a traditional annuity.
- While your money is still invested in a fund, it still has the potential to grow in size.
- Your beneficiaries will normally retain complete flexibility on how to benefit from any unused drawdown funds on your death.
Can I still buy an annuity if I choose income drawdown?
Yes you can. If you meet a provider’s minimum terms to buy an annuity, you can get one at any time. You might choose to buy an annuity alongside income drawdown to give you a blend of security and flexibility. Alternatively, you may want an annuity at some point in the future. Just bear in mind that annuity rates can go up as well as down, so it could cost you more later on if you decide to wait to buy one.
What happens when I die?
Your nominated beneficiaries can still benefit from your pension fund once you die. They can normally choose from the following options:
- Continue the drawdown plan in their own name
- Receive the full remaining value of your pension fund as a lump sum
- Purchase an annuity
- A combination of the above
If you die before age 75, the lump sum and/or income will normally be free of tax. If you die aged 75 or older the lump sum is taxed at the beneficiary's marginal rate of income tax. Any income taken will be taxed as income in the normal way.
What are the drawdown pitfalls?
The key pitfall with income drawdown is that you may run out of money if you take too much income or if your investments perform badly.
Nobody really knows exactly how long they will live, so it's hard to know how long your pension savings need to last.
What are the tax implications of drawdown?
Under current tax rules, you receive tax relief on your contributions (the money going in) but anything that you withdraw will be taxed in the same way as your income is when you are working. National Insurance, however, will not be deducted.
If you access your pension pot flexibly, the contributions that you are able to claim tax relief on will become restricted as part of the new rules. This can be a complicated area, so it is probably best to speak to an adviser or tax specialist.
Who should I talk to about taking out income drawdown?
Alternatively, HUB Financial Solutions - part of the Just Group - offers an annuity comparison service that could help you make sense of your options.