ThinkIFA guide to ‘Pension Drawdown’

What is pension income drawdown?

Couple with income pension drawdownWhilst most of you will be looking to buy an annuity when it comes to retiring, this isn’t actually your only option.

Income drawdown is where you do not convert your pension pot into an annuity but rather leave it invested and withdraw on your funds each year as an income.

The main benefit of pension drawdown is that if you should die whilst funds remain in your pension scheme then these funds will be passed on to your loved ones or surviving partner (subject to a 55% taxation).

The risks of income drawdownThe risks of Income Drawdown

Whilst pension drawdown protects your pension pot should you die soon after retirement, it is not suitable for everyone and there are some major risks involved:

  • The value of investments can go down as well as up and because your money remains invested, should the investments perform poorly then this could reduce your pension pot.
  • By regularly dipping into your investment you run the risk of emptying your funds and being left with a very small income at the later stages of your life. This could result in you having to sell assets or rely on government benefits.

  • Income drawdown or pension annuity?

    This is entirely up to you and would be worth speaking to an independent financial advisor about before making the decision as once you have purchased an annuity you cannot change your mind at a later date.

    There are pro’s and con’s for both options so it is important to be well informed before making your decision.

    Please see our comparison table below for further details regarding income drawdown vs annuities:

    Pension Drawdown Vs Annuities

    Pension Annuity
    Income Drawdown
    What happens when I die?
    Nothing, the annuity then comes to an end without any monetary value The remainder of your investment will be passed down to your family (subject to a 55% taxation)
    Is there any risk to my investment?
    No. Your retirement income will continue for the rest of your life Yes. Because your pension pot remains invested, the value of your investment could go down should it perform poorly
    How much income will I receive?
    This depends upon the size of your pension pot, health, age and other factors such as if you qualify for an impaired life or ‘enhanced annuity‘. This is dependent upon the size of your pension fund. However, with pension drawdown your income cannot be any greater than if you had purchased an annuity.
    Will I continue to receive my income until I die?
    Yes. No. Because you will be regularly dipping into your pension fund, this will reduce its value and should you continue this for a long period of time then the income will obviously reduce as you have less available to withdraw. The worse case is that you would empty your pension pot and have to hope that you are eligible for government benefits or be forced to sell any assets you have such as your home etc.
    Can I change from one to the other?
    Once you have purchased an annuity, you are not permitted to change it. With income drawdown you can simply purchase an annuity later on in your life.
    Other important information
    There are other options such as a joint annuity which continues to pay the surviving spouse an income should one of you die.
    If you have any questions at all regarding which option is right for you then please contact an independent financial adviser.

    The information in this table is an overview of income drawdown and annuities and does not constitute as financial advice. If you are at all unsure which products or services are better for you then we strongly recommend that you seek independent financial advice. Should you want to speak with an independent financial advisor about your retirement options then please fill in the contact form below.


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