What is income drawdown?
An alternative to buying a guaranteed income for life is to consider ‘drawdown’. This means your pension pot remains invested in funds of your choice and you can withdraw however much you want, whenever you want it. This has obvious attractions, but there are also risks.
The benefits of drawdown
• You can take a cash lump sum – up to 25% of which is tax free – without having to take any income.
• The rest of your pension pot can remain invested until you’re ready to draw an income.
• There are no limits on how much income you can take.
• You can use your pension pot to help with any unforeseen expenses.
• At any time, you can transfer the money in your pension pot to provide a guaranteed income for life.
• On your death, any money left in your fund can be paid to your family or your estate.
The risks of drawdown
• Your money is invested in funds that include equities and other investments that can fall in value.
• If investment performance is poor it may reduce the amount of income you can take.
• If you take too much income you could run out of money.
• The performance of your investment and the amount of income you take should be reviewed and managed on a regular basis.
What happens when you die
If you die before the age of 75, the money remaining in your fund can be paid tax-free either as a lump sum or in the form of an income (which can be a regular income or a series of one-off payments) to your beneficiaries/ estate.
After the age of 75, the same options are available, but the money is taxable at the marginal rate of the person receiving the income. This means that the lump sum or income is added to any other income they may receive and tax is calculated on the total.
Who should I talk to about taking out income drawdown?
Income drawdown can be a complex area of financial planning, so we’d recommend you take professional financial advice. If you don't have an adviser, you can find one by visiting thepfs.org or unbiased.co.uk.
We can provide advice through our Retirement Income Advice Service. We can help you make sense of your options and you can contact us on 01737 233413, Monday to Friday, 9am to 8pm.