Income Drawdown

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A slightly riskier approach...

Most people take a tax-free lump sum, of up to 25% of their pension fund on retirement but not everyone wants to buy an annuity with the remainder. If you are less risk adverse and enjoy the volatility of the stock market or want to supplement an existing income with variable income from your pension, income drawdown is an option. Your pension pot remains invested and you literally draw an income from the investments.

This enables you to benefit from any fund growth but does makes you vulnerable to downward trends in the stock market. It therefore provides a much less certain level of regular income than a conventional or fixed-term annuity. It is possible to have income drawdown in conjunction with a fixed-term annuity, or other annuity products. This combo gives you the assurance of a known and guaranteed regular income whilst allowing you to enjoy the ups and downs of investment markets.

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There are two options for income drawdown.

Capped drawdown – which limits the amount that can be withdrawn.

Flexible drawdown – which allows an unlimited amount to be withdrawn providing certain income requirements are met, known as the Minimum Income Requirement. This may be an option if you are partially retired, taking a phased retirement and anticipate a reduced working income or if you are of retirement age and still working but want to access some of your pension. You will need to consider any tax implications you may be liable for with additional income.

Income drawdown, particularly if combined with a fixed-term annuity can be a good option if annuity rates are low. It can provide a level of income (albeit uncertain) whilst rates are low and enable you to invest the remainder of your pension fund into a conventional or fixed-term annuity in the future. As you will be older and/or your health may have deteriorated you may then be eligible for an enhanced annuity at a higher rate of income.

It is generally thought that income drawdown is usually only an option for people with a large pension fund, of £200,000 plus, although most Independent Financial Advisors will consider it for most clients approaching pension age.