What is income drawdown?

Brian Mole Independent Financial Advisers Limited

Income drawdown allows you to keep your money invested for longer – but is that a smart thing to do with your pension?

What is income drawdown? Income drawdown is one option open to people with defined contribution pensions (money purchase).

Rather than using a pension pot to purchase an annuity, which will provide a stable income for a set number of years (or until you die), drawdown is where you keep your pension invested in the stock market and make withdrawals when needed.

How does income drawdown work?

Income drawdown is a form of pension product, offered by a host of different providers.you don’t need to take out a drawdown product from the pension provider you have been saving with during your working life.

When you ‘crystallise’ your pension which is essentially when you move from it simply being a pot you save into, to one that you have access to - you can take out up to 25% of the pension tax-free. With drawdown, the remaining 75% is invested in the stock market.

You can start drawing down from your pension from the age of 55, and it’s entirely up to you how much you withdraw at any point.the money you draw down is treated like normal income and is taxed in the same way.

The pros of income drawdown

One of the big selling points for income drawdown is that because the bulk of your pension fund stays invested, it can grow over time should your investments perform well.this may mean you have more money to play with in retirement to provide you with a more comfortable standard of life.

This becomes even more appealing when you consider that annuities have generally been considered to provide fairly disappointing value for money for some time. Another positive is the flexibility it provides. Income drawdown allows you to access the money you need, when you need it.

So, if you have a big purchase on the way - for example on a once-ina-lifetime holiday - then you can tap into your pension pot to do so. Finally, income drawdown is useful should you pass away, particularly when compared to an annuity. If you purchase an annuity, and then die shortly afterwards, your loved ones do not get anything from your pension savings.

But that’s not the case with income drawdown. If you die before the age of 75, your family will inherit the whole pot without paying a penny in tax.

And if you are over the age of 75, they can take the pot as a regular income or as a lump sum and will pay tax at their marginal rate of Income Tax.

The cons of pension drawdown

In an ideal world, having your pension pot remain invested means that it will increase in value over time. But the reality may be rather different.

Should the stock markets go through a turbulent time, or simply the firms in which you have invested, then the value of your pension pot will fall. As a result, you may not have as comfortable a retirement as you were expecting or may have to remain in work longer than planned to make up for any shortfalls.

It’s not just the performance of the stock market that can lead to your pension pot proving insufficient though - you also need to be incredibly disciplined about precisely how much you withdraw, not only for tax purposes but also to make sure that your pot lasts for the rest of your life.

Getting carried away and withdrawing too much money for a year or two may not seem like a big deal at the time but may leave you counting the pennies in your final years.

Another downside is that you will need to account for any fees and charges as these can add up significantly over time.

Independent Advice

Whatever your thoughts on Pension Drawdown, it is essential you take independent financial advice before you commence any form of drawdown. At Brian Mole IFA we will explain everything in plain English so you can make the right decision that’s right for your own circumstances.