Pension Drawdown can seem fairly complex as many individuals do not understand the pension drawdown rules involved, and the recent changes that have taken place. Pension Drawdown, also known as Income Drawdown, can be more flexible than taking an annuity at retirement. There are however, advantages and disadvantages in comparison to taking an annuity.
Pension Drawdown Explained – How it works
The basic premise of pension drawdown is that you can take benefits from your pension from 55 onwards, even if you are still working, and the drawdown pension plan remains invested whilst you receive an income.
At the point that you decide you wish to take an income from your Pension Drawdown plan, you have to make a decision with regards to the lump sum pension benefit of 25% that is available to you. You have to make this decision before the age of 75.
As stated earlier, your pension will remain invested whilst you take an income. The pension funds that you invest in depend on the Pension Drawdown plan. Usually, the funds available from a personal pension are the same range of funds available for Drawdown.
Pension Drawdown – Income options
There are two type of Drawdown plan – Capped Drawdown and Flexible Drawdown.
If you have guaranteed income in retirement that is greater than £20,000, you are eligible for Flexible Drawdown. This guaranteed income must come from guaranteed sources like the State Pension, Occupational Pensions or Annuities. With Flexible Drawdown there are no restrictions on your income. Effectively you could take the whole pension as a lump sum (the majority of which will be taxed)
Those that do not have a guaranteed income of £20,000 can utilise a Capped Drawdown plan. Your income limits will be reviewed every three years and is based on GAD rates. You can stop and start your income as often as you like, as long as the income received is within the income limits set. At age 75 your income limits will be reviewed every year.
Pension Drawdown Summary
- Flexible source of income in retirement
- Potential for fund growth whilst receiving an income
- Potentially greater death benefits than an annuity
- Unlike annuities, your income is not guaranteed for life
- Not suitable for cautious investors or those with small private pension pots
- Income may erode capital value if Drawdown pension fund performs poorly
- Can seem complex in comparison to taking an annuity
- Greater income levels may be available from an annuity if you are eligible for an enhanced annuity