Income Drawdown / Unsecured Pension
(Please note – Income Drawdown is a complex and constantly changing subject and the information provided here reflects the current situation. For more information call us today or complete our short enquiry form and we’ll be pleased to help you further.)
Prior to the 2015 budget, when the time came to retire, most people with defined contribution (DC) pensions — a pension plan where a set amount is paid in each month — used their entire pension fund to buy an annuity. They did so because they either didn’t qualify for income drawdown or were reluctant to pay a large amount of tax if they withdrew the whole pension pot.
Now, with the introduction of new ‘income drawdown’ rules, anyone with a DC pension and age 55 or over, can use income drawdown to provide the income they need in retirement. Pension savers who are currently in a capped drawdown can move out of that arrangement whenever they choose.
How Income drawdown works
Rather than exchanging your pension savings for an annuity (a fixed and regular income for life paid by the pension provider) the pension fund is left invested and you draw income directly from the fund. As the bulk of your pension remains invested the fund is still able to benefit from any growth (or not!) in the value of its investments. There’s no limit to the amount of income you can withdraw — you can draw as much (or as little) as you like, even the entire fund if you want.
And unlike an annuity, in a drawdown arrangement the pension saver keeps their pension pot.
Tax implications
Although you can withdraw up to 25% of your pension fund tax-free, anything else you withdraw from your pension pot will be treated as income and as such subject to the marginal rate of income tax.
Considerations
Income drawdown plans are a higher risk than a secured income arrangement such as a pension annuity, as the underlying assets of the fund are usually invested in the stock market. To ensure the pension fund does not run out of money, the member will require investment advice and regular reviews.
Some income drawdown products can be expensive in terms of charges, although they normally vary between 2% and 4% a year.
It’s also helpful if you have some experience of managing investments.
Please note we provide advice not a facilitation process, if you engage us for services we will assess your suitability and we may deem that a drawdown is not suitable for your needs, in which case we will not recommend this.
A PENSION IS A LONG TERM INVESTMENT, THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM TAXATION, ARE SUBJECT TO CHANGE.
HIGH INCOME WITHDRAWALS MAY NOT BE SUSTAINABLE.
TAKING WITHDRAWALS MAY ERODE THE CAPITAL VALUE OF THE FUND, ESPECIALLY IF INVESTMENT RETURNS ARE POOR AND A HIGH LEVEL OF INCOME IS BEING TAKEN. THIS COULD RESULT IN A LOWER INCOME WHEN THE ANNUITY IS EVENTUALLY PURCHASED.
ANNUITY RATES MAY BE AT A WORSE LEVEL WHEN ANNUITY PURCHASE TAKES PLACE.
