Income drawdown


Since the pension freedoms, income drawdown is becoming an increasingly popular option. We have provided some useful information that it’s worth reading if you are considering this option or would like to find out more.

Income drawdown is a flexible way to access your pension savings, but because your money stays invested there is more risk attached.

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.

It 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 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 income drawdown 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 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 where you will receive a fixed income), 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. Any benefits paid where someone has 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.

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.

Things to consider about flexi-access drawdown

Why do people choose flexi-access drawdown?

  • It’s a flexible way to access your pension savings
  • Your pension savings remain invested and could therefore increase in value
  • Your beneficiaries will normally retain complete flexibility on how to benefit from any unused drawdown funds on your death

How much income can I take from my flexi-access drawdown arrangement?

There’s no restriction on the amount of income you can choose to take from your flexi-access drawdown arrangement. So you have complete flexibility to decide how much income to take and when to take it.

If you’re relying on your pension savings to provide you with an income for the rest of your life you’ll need to carefully plan how much income to take. Otherwise you might find you don’t take enough income or you run out of money.

There are a number of factors to take into account when deciding how much income to take, these are:

  • How much income you need  
  • How long you expect to live for
  • How well your investments perform
  • How much you pay in charges

It’s also important you regularly review your flexi-access drawdown arrangement.

What are the tax implications of drawdown?

Any regular or one off income payments you take will normally be treated like salary. In other words they will be taxed under the Pay As You Earn (PAYE) tax system.  

Taking an income payment from your flexi-access drawdown arrangement is considered accessing your pension savings flexibly. When you do this for the first time the maximum amount you can contribute each year to a money purchase or certain hybrid pension scheme(s) without incurring tax charges reduces to £4,000. This is called your money purchase annual allowance.

What happens when I die?

Your nominated beneficiaries can still benefit from any unused funds when you die. They can normally choose from the following options:

  • Continue the flexi-access 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 and/or income is taxed at the beneficiary's marginal rate of income tax. 

Who should I talk to about taking out income drawdown?

Income drawdown can be a complex area of financial planning, so we would recommend you seek professional financial advice. If you don't have an adviser, go to thepfs.org or unbiased.co.uk.

Alternatively, HUB Financial Solutions - part of the Just Group - offers an annuity comparison service that could help you make sense of your options.

Visit the HUB Financial Solutions website