Please be informed that Trusts and Taxation advice are not regulated by the Financial Conduct Authority. Income Drawdown plans are complex; hence, it’s recommended to seek advice before acting on any information below.
Understanding Income Drawdown
Income Drawdown is an alternative to the traditional annuity route, offering increased flexibility and control. It allows you to delay purchasing an annuity, instead withdrawing a regular income or occasional withdrawals from your pension fund while the rest of the fund stays invested. As the fund remains invested, you have the potential to benefit from market growth and ongoing advice.
Eligibility and Suitability
Anyone from age 55 (anticipated to rise to 57 from 2028 and then remain 10 years below the state pension age) can establish a Drawdown contract. It may be suitable if you:
- Wish to adjust your income over time, reflecting changes in circumstances
- Want your pension fund to continue benefiting from potential investment growth and can accept the risk of the fund’s value falling
- Have other income sources
- Want to maximize the benefits your family receives upon your death and provide them more choice in how they receive these benefits
- Are in ill health, and want to pass on remaining assets to your estate
- Want to control when you buy an annuity
- Want to maintain an active interest in managing your pension fund
Consider the Drawbacks
Like any financial decision, income drawdown has potential drawbacks.
- Income withdrawals from a flexi-access drawdown pension can trigger the Money Purchase Annual Allowance (MPAA), reducing your maximum pension contribution to £10,000 gross per tax year.
- Payments above the Pension Commencement Lump Sum (PCLS) are taxable as pension income.
- Unused funds remain invested and are therefore subject to investment risk.
- Sustainability – the entire fund may be depleted, leaving insufficient funds for retirement.
- Income and lump sum benefits on death are taxable as pension income if death occurs after the 75th birthday.
- Where a lump sum death benefit is paid, it forms part of the beneficiary’s estate for Inheritance Tax (IHT), unless paid to a suitable trust.
- Ongoing reviews are necessary and may incur costs.
In Summary
Income Drawdown is generally suited to individuals comfortable with investment risk and who possess larger pension funds. However, there’s no guarantee that income will be greater than if the fund was used to purchase an annuity at retirement. Additionally, there’s no assurance that the initial income level selected will be maintained. Income Drawdown costs are typically higher than those for an annuity.
Remember, a pension is a long-term investment. The fund value may fluctuate and decrease. Your eventual income may depend on the size of the fund at retirement, future interest rates, and tax legislation.