Income (or pension) Drawdown allows investors more flexibility with their pensions than an annuity. Each time you move money into drawdown, up to 25% can be withdrawn as a tax-free lump sum. You can then move the rest into one or more funds and taxable income can be drawn directly from the pension as you wish.
The income you receive may be adjusted periodically depending on the performance of your investments.
i. The value of pensions and investments can fall as well as rise. You may get back less than you invested.
There are three main types of income drawdown product:
- flexible access drawdown – introduced in April 2015, where there is no limit on how much income you can choose to withdraw from your drawdown funds. You can also have access to lump sum’s from your pension fund.
- flexible drawdown – introduced in April 2015, where there is no limit on how much income you can choose to withdraw from your drawdown funds. This option is only available if you have a guaranteed income of £20,000 per year.
- capped drawdown – only available before 6 April 2015. There are limits on the income you can withdraw. If you are already in capped drawdown there are new rules about tax relief on future pension savings if you exceed your income cap. We can help you to understand these and plan for the future.
As Income Drawdown carries a higher level of risk and that your pension fund could run out of money, if you were to take too much money from your pension. Taking an income drawdown will mean that you have to accept the risk of running out of cash directly, and you wouldn’t have the security of that which an annuity could potentially offer.