What is the alternative to an Annuity? – Drawdown

Income Drawdown Pension

Income Drawdown, is the idea of leaving your pension invested and then taking an income directly from the underlying investments rather than converting the current value into an Annuity.  It has been around since 1995, initially you were only allowed to use draw down until your 75th birthday then the age limit was raised to your 77th birthday, finally in In April 2011 the age limit on drawdown was removed completely and now you can stay in Drawdown for the rest of your life.  April 2011 also saw the creation of a new type of Drawdown called Flexible Drawdown.

Types of Drawdown

Capped Drawdown

Capped drawdown (until 2011 the only form of Drawdown) allows you to take an income from your pension up to 120% of the limit set for your age, set by the Government Actuary’s Department (GAD), the remainder stays invested.

If you die during income drawdown, your beneficiaries will inherit what ever is left in your pension fund.  This can be taken as an Income, converted to an Annuity or converted to cash.  NB The tax treatment for the 3 alternatives are different.  Income either directly from your fund or via an Annuity is taxed under income tax. The lump sum is tax at 55%.

Flexible Drawdown

Flexible Drawdown, introduced in April 2011 allows you to ignore the GAD limits enforced in traditional Drawdown.  You are able to withdraw as much as you like from your pension, whenever you like.

However, there are some new rules, you must meet the Minimum Income Requirement (MIR), currently £20,000 par annum, from other income, such as lifetime annuities, final salary schemes, state pensions.  NB Payments from Drawdown schemes do not count towards this figure.

So why would I want to use Annuity over Income Drawdown?

With income drawdown you get lots of flexibility but with flexibility comes responsibility.  With Drawdown you are responsible for:-

  1. Your investment choices
  2. Investment Management charges
  3. Financial Advice Charges

If you choose Drawdown, you also lose out on the beneficial elements inherent in an Annuity:-

  1. A guaranteed income
  2. Cross subsidy – people with a short life expectancy subsidise those who live longer than expected.

 

Summary

Income draw down can be a useful tool for those with large pension funds, who have money left over in their pension pot once they have secured a retirement income.  Everyone else is probably better off with the security of an Annuity.

Like all financial products, to get the best deal for you, you need to consult a financial adviser To contact us call on 0161 928 2706 or email info@annuityasdviceforyou.co.uk

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