Pension Drawdown

Pension drawdown is an alternative style of retirement income that can give investors more flexibility and control over their pension options when they retire.

Two types of drawdown are available:

Capped drawdown - an option to draw an income for life, with an annual limit, without having to purchase an annuity.

Flexible drawdown – for those with secure lifetime incomes over £20,000 per year there is no limit on the income they can take from their drawdown arrangement.

The basics
An annuity converts a pension fund into a guaranteed income for life, whereas with a drawdown arrangement, income payments are taken directly from the pension fund which remains invested in a personalised investment portfolio (usually containing a blend of asset classes such as equities and bonds).
With an annuity, you can never run out of income, but with drawdown, you may erode your pension capital and eventually end up with a lower level of income than you started with. When you (and your partner) die, income payments from an annuity stop. However with drawdown when you die, any remaining lump sum can be paid to your beneficiaries (after the deduction of 55% tax).

Capped drawdown
This is the default option for drawdown.
The maximum amount of income that can be drawn will be 100% of a comparable annuity, based on tables produced by the Government Actuary's Department (GAD).
This limit will be reviewed every three years until age 75 and every year thereafter.
Any remaining lump sum at death will be subject to 55% tax.

Flexible drawdown
This is an option that will give those with larger pension funds more flexibility than everyone else.
Those over the age of 55 who can show that they have secured lifetime income in excess of £20,000 per annum will be able to drawdown an unlimited amount from their pension funds each year, but this will be treated as income for tax purposes.
The income included for satisfying the minimum income requirement (MIR) includes the basic state pension, additional state pension, any occupational pension, level annuity income and scheme pensions.
This Minimum Income Requirement means that this option in reality is only really available to a relatively smaller number of individuals.

Conclusion
Drawdown may well benefit those who do not want to buy an annuity, or who want more flexibility and control over their pension.
However, the majority of people will probably still purchase an annuity in retirement, because it is the best way of securing a guaranteed income in retirement.

Drawdown is perhaps only suitable for those with above-average pension pots, because there is more risk and complexity. The average size of personal pension funds at retirement in the UK is about £30,000, whereas a pot of more than £100,000 is the realistic minimum required for drawdown, though in the right circumstances it may be appropriate for those with smaller pots.

Investing in drawdown is more risky than buying an annuity, because drawdown pension pots usually remain invested largely in the stock market. This means that if investment returns are lower than expected, the value of the pension fund will be eroded.

As always, hunt out expert Independent advice to help guide you through the Retirement Income minefield.

Investment values can fall as well as rise and you may get back less than you invest. Past performance is not a reliable indicator of future results.

Nathan Glaister
Financial Planning Consultant

If you like this article and would like our FREE updates sent straight to your inbox then subscribe to our monthly newsletter

Subscribe

Get in touch

To find out more about how we can help you or your business, call us on 0808 144 5575 and speak to a member of our team. Alternatively use our contact form to send us a message or arrange a callback.

CALL 0808 144 5575

or

Contact Us

All content © 2015 Armstrong Watson. All Rights Reserved. Website by Simon Pighills.

Armstrong Watson LLP is a limited liability partnership registered in England and Wales, number OC415608. The registered office is 15 Victoria Place, Carlisle, CA1 1EW where a list of members is kept. Armstrong Watson Accountants, Business & Financial Advisers is a trading style of Armstrong Watson LLP. Armstrong Watson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities.

Armstrong Watson Audit Limited is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Registered as a limited company in England and Wales No. 8800970. Registered office: 15 Victoria Place, Carlisle, CA1 1EW

Armstrong Watson Financial Planning Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 542122. Registered as a limited company in England and Wales No. 7208672. Armstrong Watson Financial Planning & Wealth Management is a trading name of Armstrong Watson Financial Planning Limited. Registered Office: 15 Victoria Place, Carlisle, CA1 1EW