PENSIONS

Income Drawdown / Unsecured Pension

Enjoy a regular income without purchasing an annuity

Income Drawdown / Unsecured Pension

(Please note: Income Drawdown is a complex and ever-changing subject, and the information provided here reflects the current situation. For more details, call us today or complete our short enquiry form, and we will be happy to assist you further).

Traditionally, when the time came to retire, most people with defined contribution (DC) pensions either used their entire pension fund to buy an annuity or used the remainder to do so after claiming their entitlement to tax-free cash (usually 25% of the fund). They did so because they either didn’t qualify for income drawdown or were not willing to accept (or couldn’t afford) the associated investment risk.

Since income drawdown was introduced some years ago, anyone of retirement age with a DC pension has been able to take income directly from their pension fund without needing to buy an annuity. Now, with the introduction of new ‘income drawdown’ rules, anyone with a DC pension and aged 55 (57 in April 2028) or over can use income drawdown to generate the income they need in retirement. Pension savers who are currently in a capped drawdown can move out of that arrangement whenever they choose.

How Income Drawdown Works

Instead of swapping your pension savings for an annuity (a fixed and regular income for life paid by the pension provider), the pension fund remains invested, and you withdraw income directly from it. Since most of your pension stays invested, the fund can still benefit from any growth (or decline) in its investments’ value. There’s no limit to the income you can take out — you can withdraw as much (or as little) as you like, even the entire fund if you wish. Unlike an annuity, in a drawdown arrangement, the pension saver retains access to their pension pot.

Tax implications

Although you can withdraw up to 25% of your pension fund tax-free, any additional amount you withdraw will be considered income and thus subject to the marginal rate of income tax.

Considerations

Income drawdown plans carry a higher risk than a secured income arrangement, such as a pension annuity, as the fund’s assets are typically invested in the stock market. To prevent the pension fund from running out of money, the member will need investment advice and regular reviews.

Some income drawdown products can be costly due to charges, typically ranging from 2% to 4% annually. It is also beneficial if you have some experience in managing investments.

Please note we provide advice, not a facilitation process. If you engage us for services, we will assess your suitability, and we may determine that a drawdown is not appropriate for your needs. In that case, we will not recommend it.

THE VALUE OF PENSIONS AND THE INCOME THEY PRODUCE CAN FALL AS WELL AS RISE. YOU MAY GET BACK LESS THAN YOU INVESTED. TAX TREATMENT VARIES ACCORDING TO INDIVIDUAL CIRCUMSTANCES AND IS SUBJECT TO CHANGE.