Income Drawdown
Another option instead of an annuity?
An increasing number of retirees want to have more control over their investments. One solution to this is income drawdown the name given to the facility that enables you to keep your retirement savings invested and take an income annually rather than buying an annuity. Income drawdown is also known as pension drawdown. As of April 2011, there is no upper age limit and you may remain in income drawdown indefinitely.
There are two types of income drawdown now available, capped drawdown and flexible drawdown (find out more in pension drawdown), which one is best for you will depend on your own individual circumstances.
One of the benefits of income drawdown is that you retain control over your investments and decide on the level of income you wish to draw (within limits).
Putting you in control
This puts you in a position to continue to manage and control your pension fund by making all the appropriate investment decisions. It may also be possible to increase your income in later life, providing the fund is not depleted by excessive withdrawals of income or poor investment.
You can vary the income you can take from a drawdown arrangement annually between a minimum and a maximum. The minimum amount is £0 and the maximum is 100% of the limit set, according to factors such as your age, by the Government Actuaries Department (GAD).
The GAD limit will be based on the amount your fund would buy as an annuity based on your life only, with no allowance for any future increase. Every three years, and annually after age 75, the maximum amount that you may take from you fund has to be recalculated.
If you were to add more money into your drawdown account from your main pension fund or if you took money out in order to buy an annuity, a review would be triggered. Each year you may ask for a review to take place on the anniversary of the plan. This will then restart the three year period. In some cases, funds may also have to be moved out of the drawdown account as a result of a divorce court order; this will also trigger a review.
Income limits
How much of your pension you wish to move into drawdown is your decision. Normally, you can take up to 25 per cent as a tax-free lump sum and draw a regular income from the remainder. As there is no minimum withdrawal amount, you could choose a zero income if you wish. Any income you draw is subject to tax at source, on a Pay As You Earn (PAYE) basis. It is your decision as to where the remainder of fund is invested and you should review and monitor the situation on a regular basis.
As long as you make sure you stay within the maximum limit set by GAD, you control the level of income you take and when you take it. However, you should always be aware of the risk that your income withdrawal can deplete your capital, which will reduce the capacity for income in the future.
Annuities could still be a better option
Your annuity income could be higher than the GAD limit allowed under income drawdown if you are a smoker, or suffer from ill health, as the GAD calculation does not take health or lifestyle into account.
When using income drawdown, be aware that your capital is not only being eroded by income withdrawals but is also exposed to stock market movements. In the worst case scenario, the value of your pension fund could be eroded so much that you have little or no private money to live on in your retirement.
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