How does income drawdown work?
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 run out if investments don't perform as expected, or if you take too much income, in addition we are unlikely to know when we are going to die so planning can be very difficult. If you are unsure if drawdown is right for you, we strongly suggest you seek advice.
What income can you take? NEW RULES
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, as one-off lump sums, or even not at all. You can stop, start or vary income to suit your needs and yearly tax situation.
To date, there have been government limits (known as Government Actuary Department, or GAD limits) on how much income you can withdraw each year. Thanks to new pension rules, investors in income drawdown will be available to draw whatever income they like - but find out why some might want to consider starting capped drawdown prior to 5 April, to take advantage of higher pension contribution limits.
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 as you see fit without any outside involvement. 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 and you are subject to the vagaries of the market or wherever you decide to invest. 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.
You can choose to convert your entire pension to income drawdown all at once from age 55, or you can convert smaller segments as and when you need them (known as partial drawdown).
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.
What you do with your pension is an important decision. Therefore, we strongly recommend that you fully understand your options. We offer a range of information to help you and independent financial advice if you are still unsure. Alternatively, Pension Wise, the Government’s new pension guidance service, is due to launch shortly providing a free impartial service to help you understand your options at retirement. You will be able to access the service online, over the telephone and face to face. Further details are now available at www.gov.uk/pensionwise.