Understanding Income Drawdown
Income Drawdown is a dynamic alternative to the traditional annuity route, providing enhanced flexibility and control for individuals in retirement.
Benefits of Income Drawdown
Choice and Control:
You can delay purchasing an annuity and, instead, withdraw a regular income or make ad-hoc withdrawals while keeping the remaining fund invested. This allows potential growth in the market, coupled with ongoing advice.
Eligibility:
Available from age 55 (expected to rise to 57 from 2028, remaining 10 years below the state pension age). It might be suitable if you:
- Want to vary your income over time to reflect changes in your circumstances.
- Seek potential investment growth and accept the associated risk.
- Have other sources of income.
- Aim to maximize benefits for your family and provide more choice on how they receive them.
- Are in ill health and wish to pass on remaining assets to your estate.
- Want control over when to buy an annuity.
- Prefer an active role in managing your pension fund.
Drawbacks to Consider
Financial Implications:
- Income withdrawals trigger the Money Purchase Annual Allowance (MPAA), reducing the maximum pension contribution to £10,000 gross per tax year.
- All payments above the Pension Commencement Lump Sum (PCLS) are taxable as pension income via Pay As You Earn (PAYE).
Investment Risks:
- Unused funds remain invested, subject to market fluctuations and investment risk.
- Sustainability concerns—possibility of depleting the entire fund, leaving insufficient funds for retirement.
Tax Considerations:
- Income and lump sum benefits on death are taxable as the recipient’s pension income via PAYE on death after the 75th birthday.
- Lump sum death benefits are part of the beneficiary’s estate for Inheritance Tax (IHT) unless paid to a suitable trust.
Ongoing Reviews:
The need for ongoing reviews may incur costs.
Summary: Making Informed Choices
Income Drawdown is suited for those comfortable with investment risk and larger pension funds. However, there are no guarantees that income will exceed that of an annuity, and costs are typically higher. A pension is a long-term investment, and factors like fund fluctuations, interest rates, and tax legislation impact eventual income.
The performance of your investments is subject to risk(s). Its performance may fluctuate based on movements in the market and economic condition(s). Capital at risk. Currency movements may also affect the value of investments. You may get back less than you originally invested. Past performance is not a reliable indicator of the future performance. Tax treatment is based on individual’s unique circumstances.