The aim of income drawdown is to allow you to draw benefits directly from your pension fund whilst leaving the remainder of your fund invested. You are able to control the timing and level of income that you take from your fund within HM Revenue and Customs limits. It provides the opportunity to secure benefits for you and your dependants in the event of your death. You are also able to continue to choose where you invest your funds while taking benefits.
The maximum level of income you are able to withdraw is set by HMRC and there is no minimum income.
There are risks associated with this type of scheme. In order for the value of your fund to keep pace with inflation and any withdrawals made, you may have to invest in assets with an element of risk. This means that should the value of these assets fall, your overall retirement benefits will be reduced, especially if the investment returns are poor and the higher level of income is taken.
The income you receive is linked to the value of your fund and therefore may vary. It will be affected by investment performance, the benefits taken and the charges of the company.
Ultimately your overall benefits may be greater or less than the benefits available from an annuity. You can cease the income withdrawal and purchase an annuity at any time. The annuity rates will depend on age, health, size of fund and interest rates at the time of purchases. Rates could be worse than current rates when you come to purchase your annuity.
If you are liable to a lifetime allowance charge then such a charge could be greater by choosing Income Drawdown. You should bear in mind that the value of your fund can go down as well as up and that past performance is not a guide to future performance.
The maximum level of income calculated in accordance with HMRC rules may change and this could mean that your income is reduced.
Income Drawdown is an alternative to purchasing an annuity. Once you have selected income drawdown you can change your decision and purchase an annuity at any time. By law there must be a review every 3 years up to age 75 for an income drawdown pension, and then every year from age 75, to recalculate the maximum income withdrawal limit in accordance with HMRC rules. You should be notified of this by the company. After a review it may be that your income levels have to be reduced.
Any funds remaining after taking a tax free lump sum remain invested and are used for income withdrawal until you decide to buy annuity or on death. It is possible to phase taking your benefits but this may, in some circumstances, reduce your potential maximum tax free lump sum. HMRC set a maximum level of income that can be taken from your pension fund. There are no minimum income requirements and therefore it is possible to take your tax free lump sum from you pension without commencing an income.
Each year you can decrease or increase the income you withdraw within the limits set by HMRC, you can also alter the frequency of the income withdrawals.