Income drawdown is a flexible alternative to the traditional annuity route, giving you more control over how — and when — you take an income in retirement.
The benefits
Choice and control
You can delay buying an annuity and instead take a regular income or occasional one-off withdrawals, while the rest of your fund stays invested. That gives it the potential to keep growing, with ongoing advice along the way.
Who it may suit
Drawdown is available from age 55 (expected to rise to 57 from 2028). It might suit you if you:
- Want to vary your income over time as your circumstances change.
- Are looking for potential investment growth and are comfortable with the risk that comes with it.
- Have other sources of income to draw on.
- Want to make the most of what you can pass on to your family, with more choice over how they receive it.
- Are in ill health and would like to pass remaining assets to your estate.
- Want to choose when — or whether — to buy an annuity.
- Prefer to take an active role in managing your pension fund.
The drawbacks to weigh up
Tax and allowances
Taking an income triggers the Money Purchase Annual Allowance (MPAA), which reduces the amount you can pay into a pension to £10,000 gross per tax year. Anything you take above your tax-free cash (the Pension Commencement Lump Sum) is taxed as pension income through PAYE.
Investment risk
Because your fund stays invested, its value can rise and fall. There is also the risk of drawing too much and running the fund down, leaving less than you need later in retirement.
Death benefits and Inheritance Tax
After age 75, income and lump-sum death benefits are taxed as the recipient’s pension income through PAYE. Lump-sum death benefits can also form part of the beneficiary’s estate for Inheritance Tax, unless they are paid into a suitable trust.
Ongoing reviews
Drawdown needs regular reviewing to stay on track, and those reviews may carry a cost.
In summary
Income drawdown tends to suit people who are comfortable with investment risk and have a larger pension fund. There is no guarantee it will provide more income than an annuity, and costs are typically higher. A pension is a long-term investment, and your eventual income will depend on fund performance, interest rates and tax rules at the time.
Important — the risks
The performance of your investments is subject to risk. Its performance may fluctuate based on movements in the market and economic conditions. Capital is 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 future performance. Tax treatment is based on an individual’s unique circumstances and may be subject to change.