If you are looking to retire but don’t want to commit to a lifetime annuity just yet, income drawdown could be the answer. Income drawdown allows you to take your tax-free lump sum and then choose if or when you also draw an income and, if so, how much.
Your pension fund remains invested, which can be attractive to those who don’t intend to draw any income for a few years. There is the possibility that the pension fund will grow allowing you to take a higher income from the fund in the future. However, the value of your fund can fall as well as rise making drawdown riskier than an annuity.
If markets fall in value you could be left with a lower fund to provide an income when you need it.
Income drawdown is therefore only suitable for those who can afford to, and are willing to take the risks. It is a complex product so if you are at all unsure take advice from a competent Chartered Financial Planner.
Despite the potemtial uncertainties drawdown is becoming increasingly popular. This is particularly the case with investors who have a secure form of income elsewhere such as a final salary pension or an existing annuity. These investors probably can afford to risk keeping part of their pension invested in income drawdown and could benefit from an increased income as a result.
Whilst the income is not secure, it is one way of potentially protecting against inflation particularly if you have other secure sources of income to fall back on.
Another reason drawdown is becoming so popular compared to an annuity is the associated death benefits. Drawdown allows your funds to be passed to surviving friends or family in the event of your death, subject to a 55% tax charge. Your pension is often one of your biggest assets so this is an appealing option.
In standard income drawdown you can choose how much income you draw, altering it between zero and a capped maximum (which is calculated to be 120% of the income an annuity would offer from the same pension pot).
However there is a second option called flexible drawdown. This option removes the income cap for some investors allowing them to take as much income as they need from their fund in retirement. To qualify for flexible drawdown you must meet set criteria including already being in receipt of a secure pension income of at least £20,000 per annum.
Drawdown can be used by itself, or alternatively you could split your pension and use drawdown alongside an annuity, combining flexibility with a secure income. When selecting an income drawdown plan it is important to look at the charges applied to your fund. Charges vary drastically from company to company and excessive fees will eat into your future income.
The post Income Drawdown appeared first on Retirement Genius.