Income Drawdown - The More Flexible Retirement Option
It is no longer compulsory to buy an annuity at 75 so it is now possible to take more of your money out of your pension before you have to buy an annuity, or not buy an annuity at all.
People with defined contribution pensions often opt for Income Drawdown as a way of providing retirement benefits because of the flexibility it offers in terms of income levels and death benefits. Since April 2006, you can vary your income from this type of plan between nil and around 100 per cent of the equivalent of the annuity you could buy with the same pension fund. These income limits are reviewed every three years. Unlike a conventional annuity, all is not lost on death as your beneficiary can have the remaining pension fund, less a 55 per cent tax charge. Alternatively, they can continue with the income drawdown from the fund, or potentially use the fund to buy an annuity in their own right.
An unsecured pension – or income drawdown, allows you to draw an income from your pension fund, while leaving your fund invested. However, it is important to understand that - as its name suggests - an unsecured pension's capital value and the income it generates could both fall during the time the fund remains invested.
Income Drawdown can be particularly useful for those who are partially retired and who are receiving some form of income. The ability to draw income directly from the fund rather than purchasing an annuity can provide you with a great deal of flexibility around the amount of income you take and the timing of that income. This can be used to maximum effect if you have only partially retired and are still receiving some form of income. You can use the income from your pension fund to "top up" and meet your income needs.
This is also an alternative option for those approaching retirement, as it can enable you not only to draw an income, but also to grow your pension income by investing retirement assets in a range of investment funds.
It is not necessarily a decision of an unsecured pension versus an annuity. You can do a bit of both. You could consider using part of your pension fund to buy an annuity to deliver a core level of income; the level being set by the minimum income that you require. You could draw an income directly from the balance of the fund thereby utilising some of the advantages of unsecured pensions.
It is important to note that when taking retirement income in this way there is no ongoing guarantee of income and the fund's capital value can alter, so your attitude to risk is an important factor when considering this route. This also means your pension fund will need to be reviewed on a regular basis, to consider the sustainability of the income and reviewing the investment mix and performance of the underlying investments.
If you would like to explore this further you can speak to a retirement expert on the above number or by email PENSIONSadvice@twpwealthmanagement.co.uk