Hargreaves Lansdown

How does income drawdown work?

Income Drawdown

Income drawdown - what is it?
How does it work?

Discover how income drawdown works, the risks and the
benefits. Plus, how new rules could let you draw out as
much as you like.

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Important information - Income drawdown is a complex product, if you are at all uncertain about its suitability for your circumstances we strongly suggest you seek advice. Your income is not secure. You control and must review where your pension is invested, and how much income you draw within limits. Poor investment performance and excessive income withdrawals can deplete the fund leaving you short of income.

First you decide how much of your pension you want to move into income drawdown. You can choose to convert your entire pension to drawdown all at once, or you can convert smaller segments as and when you need them (this is known as partial drawdown).

You can usually take up to 25% of each amount you move into income drawdown as a tax-free lump sum. You then keep the remainder invested in the income drawdown plan, drawing taxable income directly from the fund.

Income drawdown can be a more flexible option than an annuity, for those who are comfortable with the risks. The fund remains invested and you stay in control, but crucially income is not secure. Retirement income could rise but also dwindle if investments don’t perform as expected, or if you take too much income. If you are unsure if drawdown is right for you, we strongly suggest you seek advice.

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FAQs


What income can you take?

Income drawdown gives you flexible access to your pension. You decide how much income to take from it. You choose whether to take income monthly, annually, ad-hoc, or even not at all. You can stop, start or vary income to suit your needs and yearly tax position.

Currently, there are government limits (known as Government Actuary Department, or GAD limits) on how much income you can withdraw each year. However, from next April, thanks to new pension freedom rules, you should be able to draw as much as you like.

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Tom McPhail, Head of Pensions Research at Hargreaves Lansdown, explains the main differences between an annuity and income drawdown.



What makes income drawdown more flexible?

Income drawdown allows you to keep your retirement options open. You can vary income to suit your needs and changing circumstances, and stop and start income at will. There are no lifelong decisions when you first enter drawdown (unlike an annuity which is fixed for life) but to balance that there is the risk you might run out of money. There are also greater options for passing funds on when you die.

The flexibility has a flip side: income is not secure. If the idea of income drawdown appeals to you, but you also want secure income, why not consider a combination of annuity and income drawdown? You could use the annuity to cover your basic living expenses, and income drawdown to provide a potentially growing income, although remember with income drawdown there is the risk that income could go down or run out.

Top tip

You can choose to convert your entire pension to drawdown all at once from age 55, or you can convert smaller segments as and when you need them (known as partial drawdown).

Calculate how much income you could take

Income drawdown will not be for everyone. Take advice if you are at all unsure.

The pension fund remains invested and so income will be subject to both positive and negative market performance. Your income could increase or be completely eroded leaving you with nothing. Your pension can be depleted by taking excessive income, which then reduces the capacity for income in the future. If you live longer than average you will not benefit from the security of a guaranteed income for life that an annuity offers.

Income drawdown in the Vantage SIPP is offered without advice as standard. Due to the high risk and complexity, if you are at all uncertain, we strongly recommend you seek financial advice on 0117 317 1690.

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