Changing times: income drawdown

Times change and people now want more flexibility and control over when and how they take retirement benefits. This is a complex area so do enlist the help of a financial planner who is qualified in pensions and investments as your guide. Provided you do not require a cast-iron guarantee for your income in retirement, and are comfortable to continue to invest your funds, then you can use what is known as Income Drawdown, or the Alternatively Secured Pension in official language. Think of this as adding a tap at the bottom of your pension pot. After taking a tax free lump sum, the tap can then be opened and closed (within government limits) depending on the level of income required. Before age 75, this can be up to 120% of the annuity available.

As people stop work they could be looking forward to a further 20-30 years of life. It is possible they will continue to work in some capacity. They may go part time or take up a new career. If they can open and close the tap on the pension fund, they can then draw down income to supplement any reduction in earnings from other sources. And they can do this on their terms rather than having to buy an annuity on an insurance company’s terms.Consequently clients are loath to make a decision on how they wish to draw an annuity at their date of retirement, for the rest of their life and cast in stone with no ability to review the decision. Income Drawdown offers far more flexibility about how much and when income can be drawn down from the fund.

The decision over whether to accept an annuity would be an easy one – if we knew the date we were going to do. However most of us cannot claim to have this insight and the bald fact about an annuity is that we die early, the insurance company gets to keep the fund.There can of course be some guaranteed period or joint life basis built into the annuity. But this means you have to take less income.But under income drawdown, the fund remains invested. If you die before you are 75 the entire fund can be repaid to your family or dependents less tax at 35%.

Another great advantage us that your fund would remain invested, so can still grow in size and offer the chance of an increase in maximum income in later years. Of course there is risk – the value of your fund can go down as well as up. But if are comfortable with that, Income Drawdown can be a very appealing alternative to buying an annuity in the right circumstances. But don’t forget to ask an expert for help.