income drawdown
This option allows you to take maximum tax-free cash from
your pension pot and invest the balance of the fund from which a regular income
can be drawn-down (within government limits). Under current regulations, an
annuity must be bought by the age of 75.
This option allows for more investment control by the retiree. However, continuing
to invest the pension fund, whilst taking an income from it carries a risk,
in that poor returns may threaten to reduce the value of the pension fund
and therefore the eventual income that you take as an annuity.
Recent investment conditions have impacted significantly on this product especially
since many schemes have a high degree of equity investment in order to provide
the growth potential required to achieve the critical yields that are required
to protect the eventual annuity income. Low risk/low return assets are not
ideally suited to this product because they may not provide the potential
to maintain the pension pot for retirement.
Advantages
- Immediate access to tax-free cash.
- There is a choice of lump sum or income payments to beneficiaries on
death before annuity purchase (lump sum benefits are, however, subject to
tax).
- Flexibility of annuity purchase. This means that you can chose when to
buy your annuity which provides the possibility of securing better annuity
rates - if rates improve in the future.
- You maintain investment control of the draw-down fund.
- Choice of income - the government actuary department set a maximum draw-down
level and you can choose any where between these limits.
- Increased flexibility - in terms of income, investment and timing issues.
- Death benefits - no need to pre-purchase spouses death benefit with this
option. Widows(ers) can inherit drawdown income on death.
Disadvantages
Income taken will be taxed as earned income.- The cost and complexity of the arrangements are higher than annuity purchase
and also possibly phased retirement. The plan is reviewed every five years
by the company and at least annually by your adviser.
- On death the proceeds of the fund are available to beneficiaries by either
income or a lump sum. The lump sum is subject to a tax charge of 35%. This
situation is less attractive than phased retirement whereby the unopened
segments will be available tax-free to beneficiaries.
- Investment returns during the plan and annuity rates at your desired retirement
age may be less than expected.
- Risk - this is not an option for the cautious investor. The funds under
investment need to achieve a good level of growth in order to offset the
fact that income is being taken from the fund. Historically, over the long
term equity investment has managed to produce the required levels of returns,
however, the increasingly poor stockmarket conditions and low returns in
other sectors might indicate that it could be difficult to achieve a good
level of growth in the future.
