Unlike an annuity, with Income Drawdown your money remains invested and you simply take a pension income directly from it.
This is the most flexible way to take your pension benefits, although it may not be suitable if you want the security of income that an annuity offers.
This option might suit you if you want:
- To carry on paying in to your pension – if you’re under 77, you can still add to your pension pot and get tax relief
- Growth potential – as your pension pot stays actively invested in a tax efficient environment, there is potential for future growth
- A flexible pension income – you can take payments to suit you if you have a pension pot that’s large enough to sustain your withdrawals from it
- More control – you can buy an annuity at any time
- Flexible options on death – unlike some annuities, this pension can give flexible benefit options after your death
How much income will you get?
Income drawdown allows you to take a flexible income directly from your invested pot, within limits set by HM Revenue & Customs. Aside from these limits, the income you’ll get depends on a number of factors. The most important ones are:
- The amount of money you have available in your pot to take an income from
- How often you draw an income and the amount you take from your pot. The more you take, the less you will have for future years.
- How your investments perform. For example, a lower than expected performance can reduce the amount of income you can take in future.
Income Drawdown v Annuity
An annuity is a lifetime contract and cannot be changed once started. For example if annuity rates increase you cannot get a better deal. If you are close to the age 70 or more then annuity rates are likely to be favourable for most people. However a person in their mid 50’s or early 60’s may not benefit from a contract that cannot be changed for the rest of their lives.
However if you have a small pension pot and no other means to support yourself an annuity is likely to be most suitable.
Income drawdown offers younger clients in particular more options in retirement and the chance to see their money grow even after they have retired. As long as you understand the risk versus the reward and have a large enough pension plan (£50,000 typically) to absorb costs etc then these are a viable option.
