There are many ways to take your pension and one that has become increasingly popular following the ‘pension freedom’ reforms is income drawdown. The main option for pensions used to be to buy an annuity from an insurance company that would then pay out to the pensioner for the rest of their life, but income drawdown has started to appeal to more pensioners recently.
Income drawdown allows pensioners to take money from their pension when they need it from the age of 55 or over. They may be a good choice for some people, but they aren’t without their disadvantages. As independent financial advisors in Lancaster who help any people choose the pension that best suits them, we have plenty of advice to give on whether you should take an income drawdown or not. But first…
What is an Income Drawdown?
With an income drawdown you’ll have the option to take a tax-free lump sum (usually up to 25% of the pension pot but possibly more), a taxable income, or a combination of the two to give you a way to take an income from your pension in a tax efficient way. The money left in your pension pot will continue to be invested; possibly replenishing the money you take out. While your pension is in an income drawdown, any money remaining in your pension after you die can be passed on to your beneficiaries.
Things to Consider With Income Drawdown
Income drawdown sounds like a very attractive option but for some people they may not be the right way to go.
Although annuities may not seem as good in comparison, with smaller payouts and no chance of passing on the money to beneficiaries after you die, some pensioners may find this route far more beneficial. One of the risks with income drawdown is that the returns could be worse than the investments, diminishing the pension pot until it is empty. For those who would have no other income other than the pension, an annuity is the best choice, where there is no chance the pension will stop being paid.
Those who have smaller savings pots won’t feel much of a benefit from income drawdown as there’ll be little to invest and any return will be small. In a drawdown these people will quickly run out of money and have to depend on the state, but with an annuity they’ll be able to receive money for the rest of their lives; albeit a smaller amount.
Of course, outside of this you may actually benefit from income drawdown. The possibility of money that replenishes itself, and the fact that you can pass on what remains after you die to your beneficiaries makes it a great option for those who can afford it. There will always be the option to switch to an annuity later down the line anyway if you feel that your income drawdown isn’t doing what you want for you.
If you need any advice then the experienced team at Burton & Fisher will be here to help you with any of your enquiries. For more information about the advice that we can give, contact us on 01524 416872.