Income Drawdown

What is income drawdown?

Income drawdown, also known as a pension drawdown, an unsecured pension(USP), or pension fund withdrawal, is where the remainder of the pension fund(savings minus 25% withdrawn as tax-free lump sum) is left invested and used to provide an income from the pension. New income drawdown rules were introduced in April 2011. One of the major advantages of income drawdown is that it allows you greater flexibility.

Unlike an annuity where the income is set, recipients can choose how much income to take. Under the old rules, in a capped drawdown scheme, there is no minimum amount of income that must be drawn, no matter how old you are. So, if you prefer, you don’t have to take any of that income at all. The maximum income that can be drawn is 100% that a male of your age could purchase an annuity for based on the government actuary’s department (GAD) rates. Before 2011, the maximum income was 120% of this limit. The limit has now been raised to 150%for all pension years starting on or after 27th March 2014, so you may choose to take more money from your pot each year. You can also choose to stop income drawdown at any time and buy an annuity instead.

With a flexible drawdown scheme, you can make as many withdrawals as you like. However, you will need to declare that you are already receiving a secure pension income of at least £12,000 a year since 27th March 2014(from a company pension/annuity/or state pension) and are no longer saving into a pension.

Since April 2015, all new drawdown products are designed to offer flexi-access drawdown. Flexi-access drawdown allows you to withdraw as much or as little retirement income as you would like, whilst choosing how the remaining funds are invested. You are able to take up to 25% of your pension tax-free, as a lump sum or in portions. Once you commence taking an income from your drawdown pension you will become subject to the Money Purchase AnnualAllowance (MPAA) which means you can only contribute £4,000 per year into a pension.  

If you die during income drawdown, the remainder of your pension fund can be passed on to your beneficiaries.

If you die before the age of 75, any money left in your drawdown fund passes tax free to your nominated beneficiary whether they take this as a lump sum or as income. The money must be paid within two years of the provider becoming aware of your death. If this two-year limit is missed, payments will be added to the income of the beneficiary and taxed at their marginal rate.

If you die after the age of 75 and your nominated beneficiary takes the money as income or lump sum, the money will be added to their income and taxed at their marginal rate.

You should bear in mind, however, that if you stay invested and investment returns are poor, the value of your pension fund may fall. As a result, you will have a lower pot to take withdrawals from, and you will have less to buy an annuity with. What’s more, if annuity rates fall while you’ve stayed invested, when you do come to buy an annuity, the rate you receive could be far lower. It would help if you also considered charges as there will be investment management charges for your investments and administration charges for your drawdown plan. You, therefore, need to consider income drawdown carefully.