Income drawdown allows you to keep your pension fund invested during your retirement, drawing an income from it directly. It is one of the alternatives to purchasing an annuity in order to provide a retirement income.
Drawdown in 2015 - What has changed?
The pension reforms that came into effect in April 2015 have made pension drawdown a more accessible option than ever before. Restrictions have been lifted on the amount of cash you can withdraw, the ways in which you access it and conditions of eligibility. As well as removing the need for capped drawdown, flexible drawdown is set to become a more commonplace income option.
You’re able to take up to 25% of your pension fund’s value tax free before entering income drawdown. Or you can opt for 25% of each withdrawal to be free of tax.
Benefits of income drawdown
- The ability to access your pension fund as and when you need it
- Leaving your savings invested for a chance of future growth
- Being able to pass your pension pot on to loved ones once you die
Is pension drawdown the right option for you?
Taking the income drawdown route involves some serious considerations as, unlike an annuity it does not guarantee you an income for life.
There are no minimum or maximum withdrawal limits with pension drawdown – you have complete flexibility over how you manage your retirement income.
Before entering income drawdown you must make considerations about whether your life expectancy and income requirements for that period of time are realistic; this will ensure you don’t overspend and run out of money before the end of your life.
Drawing an income with pension drawdown
With income drawdown, your pension fund remains invested and withdrawn as you need it. Investments can be managed solely by you or alongside an investment advisor. Many people opt to only use the income generated by their investments as income, leaving the base value to generate further returns.
This is partly why income drawdown was previously restricted and favoured toward those with larger pension funds that had the capital and financial acumen to generate a strong yield from investments.
It’s worth remembering that by choosing to enter pension drawdown, you also have the option of using remaining funds to purchase an annuity later in life. This will provide you with a guaranteed income for the rest of your life, and can even help to pay for any care costs that may be required.
In order to help you with your retirement planning, in this section you’ll find detailed information on pension drawdown and the options you have on retirement.