Income drawdown is an alternative to purchasing an annuity and allows you to keep your pension invested while taking a portion of the pension each year as income which is where the term income drawdown is derived.
Income drawdown is flexible enough to allow you to take different levels of income each year. You can choose to take no income at all or up to 100% of the limit set for your age by the Government Actuary’s Department (GAD). The rules regarding income drawdown are complex and you are strongly advised to seek financial advice before making your final decision.
Benefit of Income Drawdown over Annuities
You are able to switch and purchase an annuity at any time while in income drawdown whereas if you choose an annuity, that decision cannot be reversed.
If you die during income drawdown, your loved ones can inherit the remaining fund less 55% tax or be paid an annuity or draw income from the fund. Annuities cannot be passed on to your heirs meaning that if you die early into your annuity lifecycle, the pension pot you had saved up to purchase the annuity will not be inherited.
Downside of Income Drawdown over Annuities
Purchasing an annuity will guarantee you an income for the rest of your life. Opting for income drawdown means that you are risking the value of your pension fund falling depending on its performance. If the pension pot does go down, you may not be in a position to replenish the fund as you are in retirement.
As income drawdown is not guaranteed for life (unlike annuities), you only have income while there are funds in the pot. An empty pension pot will mean reduced income in later retirement.
In summary, income drawdown is not suitable for everyone and is usually most appropriate for those with a large pension pot.