Using drawdown for retirement income

Using drawdown for retirement income

If you are a member of a defined contribution pension scheme, drawdown or ‘income drawdown’ is an option which allows you to take income directly from your pension fund, while it remains invested. Most plans set up before 6 April 2015 are known as ‘capped drawdown’, which means that there are limits on the amount of income that can be taken. For plans set up after 6 April 2015, known as ‘flexi-access drawdown’, there are no limits to the amounts of income or lump sums that can be taken.

If you decide you’d prefer the flexibility of a drawdown pension, you need to make sure that you understand the pros and cons of choosing this route as there are some risks.

Take care when deciding whether this product is suitable for you and your personal circumstances as there are elements of risk that could affect the income available to you.

Drawdown
Advantages Disadvantages
Flexibility about when and how much income you can take (from flexi-access drawdown schemes) There is an element of risk - investments may fall and your pension fund could decrease, which could mean a significant decrease in future income
Flexibility to decide how much of your fund you want to invest where – whether that’s choosing a ‘low risk’ fund, a ‘higher risk’ fund that may provide a better return, or a mixture of both. Fees will usually be charged for administration and investment management. The costs associated with these arrangements can be high.
On your death, up to age 75, the remaining drawdown fund can be returned to your beneficiaries as a tax free lump sum, or they can continue to receive the income tax-free through drawdown. If you die age 75 or above, the remaining drawdown fund can be returned to your beneficiaries as income or lump sum (though it will get added to their other incomes and taxed at their marginal rate). Generally, smaller fund sizes are unlikely to survive a prolonged fall in investment performance.
You can still secure a guaranteed income later on in your retirement provided you still have the funds to do so. The amount of income you would receive is not guaranteed; charges may apply when you take an income; or the rates used in converting your pension pot into an income may change over time. So if you choose to take an income at a later date then the amount of income may be more or less than if you convert all your pension pot into a guaranteed income for life in one go.
  If you’re either in capped drawdown and you withdraw more income than the limit set by HM Revenue & Customs, or you take income from flexi-access drawdown, you will trigger the Money Purchase Annual Allowance.  This means that if you want to continue to contribute to a pension and your contributions (including those of your employer and the tax relief you receive) exceed £4,000, you may incur an additional tax charge.

If you are considering this type of product it is important to get some guidance or advice about its suitability for your personal circumstances.

Your financial intermediary can provide advice but if you don't currently have one, you can find someone local to you on www.unbiased.co.uk. Alternatively every retiree is entitled to some free guidance from the UK government’s ‘Pension Wise’ service. 

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