Flexi-Access Income Drawdown contracts can help customers manage their pension affairs in a way that best suits them.

About Income Drawdown

Likewise, once you have decided to stop contributing and take your benefits, similar to an annuity you can take a lump sum and income directly from the fund. Unlike an annuity you do not give the fund to a provider in exchange for an income for life, but still keep the pension fund under your control, and hopefully keep it growing.

It is down to the very flexible nature of these plans that customers find many differing ways of using them to suit their own needs and the needs of their families. Just see the examples above.

It would not be possible to discuss in depth all the variations and uses of an income drawdown contract on this website. However we do provide all customers who request quotes from us, a very detailed information pack explaining how income drawdown contracts work in detail. Simply request a FREE no obligation income drawdown quote and we think you will be impressed with the information pack you receive.

We also have experienced and qualified staff who would be happy to discuss any scenario you would care to put to them, as well as answer any questions you have.

Further down on this web page you will find more information on the scenarios listed above, as well as information on some more technical matters such as flexible drawdown.

It is our standard service to offer Income Drawdown without advice and nothing on this website should be considered a personal recommendation based on your circumstances.

Given their complex nature it should be remembered that Income Drawdown contracts are considered to be higher risk contracts than traditional pensions and annuities. You should make sure before you purchase one that it is entirely appropriate for your needs.

Income Drawdown - Benefits and Risks

Benefits

You remain in control of your money invested in the drawdown. It is available for you to manage your retirement income, as you see fit, within the rules governing income drawdown.

The fund remains invested giving you the option to grow it further at a time when you don’t need the income from an annuity.

You can phase the amount of income, if any, that you receive from the fund to ease you into retirement. You can take anything between 1% and 120% GAD, which stands for Government Actuarial Table (GAD) which is a calculation of the percentage of the fund you can take based on your gender and age.

Unlike a conventional annuity, you can still control how the drawdown fund is invested even when you are receiving income.

The fund remains part of your estate. Should you die before the fund is exhausted, it will form part of your estate and therefore pass to your family. Your spouse can use all of the remaining fund to purchase an annuity or similar product. If the fund is taken as a lump sum it will be taxed at 55%.

At any time you can cash in the drawdown contract and buy an annuity* You don’t have to buy an annuity on the day you retire, but can opt to take an income direct from the drawdown contract. This means that you don’t lose the opportunity of impaired health annuities or switching to an annuity should there be a significant rise in annuity rates at a later date. All the while you are in a drawdown contract you still have an “Open Market Option” to buy an annuity.

* If you use a drawdown contract that has a fixed term and you leave the contract before the term expires you may lose any guarantees associated with the contract.

Risks

The fund in your drawdown contract is subject to investment market fluctuations. If the funds you select do not perform you could find that the fund has shrunk rather than grown. This again could have a negative impact on your retirement income. It should be remembered however, that if your existing pension plan is also invested in this way, then you are already exposed to this risk.

There is a possibility that if you deplete the fund too quickly you could run out of money in retirement.

If you were to die before you converted the drawdown into an annuity, then the fund would pass to your estate. If your partner or family wanted it as a lump sum it would be taxed at 55%.

Your existing pension may have some guarantees built in that you may lose if you transfer into a drawdown contract. You should check this, or authorise us to check on your behalf, before completing the switch.

If you are planning to take an annuity at a later date, then should annuity rates decline you may not get as much income as you would have if you had annuitised now.

Pension legislation keeps on changing. We have previously seen legislation introduced in 2006 and 2011. Both of these government bills had positive and negative impacts on income drawdown. At any future point in time a government may again legislate on income drawdown and that legislation may impact negatively upon your plans.

If you want to understand the risks and benefits of Income Drawdown further please call us on 020 33 55 4827 and one of our qualified staff would be happy to explain in detail.

Income Drawdown Scenarios

Warning : These are very simple explanations aimed at giving you a basic understanding of the concepts discussed. They are not complete explanations of how an income drawdown contract is used in these various scenarios and you should not rely upon them as the basis of any decision you make.

To take a Tax Free Lump Sum

Our pension lump sum calculator will tell you how much you can take from your pension fund as a Tax Free Lump Sum. You can also request our FREE no obligation quote which includes an information pack that explains everything you need to know.

To phase their retirement

We can help you to use income drawdown to phase in your retirement. Simply use our free no obligation quote service and we will get personalised quotes and a comprehensive information pack delivered direct to your home or email account if you prefer.

To continue to grow their investment before and after retirement

Again an income drawdown contract may be the ideal solution for these customers. Both before and after retirement the fund is owned and controlled by the customer. Even after they have retired and are taking an income directly from the fund, they can still make investment decisions aimed at growing the fund. For those customers who wish to invest in areas beyond the funds offered by the Drawdown provider, or who wish to have their fund managed by their stockbroker, we offer a “Self Invested” drawdown contract. If the “Self Invested” option appeals, please make us aware of this at the time you request your quotes.

Request a FREE no obligation quote and income drawdown information pack now

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To protect their fund before retirement and get guaranteed growth

Before you take out the contract the provider will tell you exactly what you will get back at the end of the term. Then at the end of the term, as long as you have not broken the contract rules, you will get the guaranteed maturity value. You will have an Open Market Option with this money and can use it to purchase any retirement product you wish.

It is even possible to buy a guaranteed minimum pension now at a set retirement date in the future using a similar contract.

If you want a better understanding of how guaranteed income drawdown plans work, request our FREE no obligation quote which includes a comprehensive explanation of how these contracts work.

To provide a further tax free lump sum in the future by recycling income

Some people who just want to take a pension lump sum several years before retirement nevertheless also take maximum income. They take this income (not the Tax Free Lump Sum) and invest it back into a personal pension (assuming their income allows). This is a tax neutral transaction as tax is paid on the income taken from the drawdown contract, but then tax relief is given on the pension contributions, up to current limits (£50,000 in 2011/2012).

Please Note : it is perfectly legal to recycle income from an income drawdown contract back into a personal pension plan. However it breaks HMRC rules to put the Tax Free Lump Sum back into a pension plan, as obviously you have already received a major tax benefit on this money.

As a very simple example, if a basic rate tax payer received £100 per month gross from a Drawdown plan, after tax they would receive £80. If they then paid the £80 back into a pension plan, they would get £20 tax relief making the total pension contribution £100. What has come out of the income drawdown has gone back into a new pension plan.

To keep things simple, the following example ignores investment performance and provider charges which will have either a negative or positive impact on the figures :

If a customer were able to take £2,000 gross per annum income from an income drawdown contract each year for 10 years and place it into a pension plan, at the end of 10 years the income drawdown contract would be £20,000 lighter but they would have a new pension plan worth £20,000.

At this point the customer now wishes to use all of their retirement funds to purchase an annuity. Whatever remains in the income drawdown contract must all be used to buy an annuity - the Tax Free Cash was taken 10 years ago. However a Tax Free Pension Lump sum can be taken from the pension plan. Based on the figures used in this example 25% of the fund (£5,000) can be taken as a Tax Free Lump sum and the remaining £15,000 used to purchase the annuity.

In this scenario we have used the income drawdown contract to create a further Tax Free Lump sum from the original pension fund by recycling income back into a personal pension.

Again for the avoidance of doubt you should remember that investment performance and provider charges will cause the figures in this example to fluctuate and the amount you get back could be higher or lower than those indicated.

To pass their fund onto their family

It is possible for a customer to give a fund worth hundreds of thousands of pounds to an annuity company and build in 100% for their spouse. However only three months after taking out the annuity they are both killed in a car crash. In this scenario the annuity company would keep the fund with no obligation to pay any further money to the family or estate. Even if a 5 year guarantee had been selected the annual income would only be paid for the remaining 4 years and 9 months. The annuity company keeps the rest.

Because an income drawdown contract remains under your control, even if you are taking an income, if you should die then it remains part of your estate. Your spouse could use all of the fund to purchase their own retirement product. If it passed to your children or estate then it would be paid as a lump sum, but eligible to tax at 55%. While this is undoubtedly a high rate of tax, some customers would prefer this to the risk of losing the entire fund to an annuity company.

Use our no obligation quote service and receive a FREE information pack explaining everything you need to know about income drawdown.

To release all of their fund as a lump sum

Our comprehensive information pack fully explains Flexible Drawdown and is provided free of charge to all customers who request an income drawdown quote.

To release more income than available from an annuity

It should be remembered however than the income from the annuity is guaranteed for life, while the drawdown income can fluctuate and even reduce. The amount of income you can take will be reviewed every 5 years, and at even shorter periods as you get older. If the underlying value of your investment has decreased or not kept pace with a required growth rate, or if the actuaries re-assess your life expectancy upwards, then the income from the drawdown will reduce.

You do have the opportunity when using a standard income drawdown contract to purchase an annuity whenever you wish. If you take too much income out of your fund you run the following risks :

Your fund could simply run out of money leaving you with no income.

At the point you choose to buy an annuity, you could get less from the annuity than you could have got, had you purchased an annuity instead of taking income from the fund.

Income Drawdown - Technical Information

At their most basic level income drawdown plans work just like a conventional pension savings policy, in that you can pay lump sums or make regular contributions into them. These contributions can be made by you or an employer and just like a regular pension policy the contributions attract tax relief.

Just like a pension plan, your money in an income drawdown contract is invested in one or more investment funds aimed at delivering growth.

It is at the point that you decide to take benefits (Tax Free Lump Sum and / or Regular Income) that income drawdown comes into its own. As discussed in the examples above they are very flexible contracts that allow you to take your benefits in the way that you want.

We have already discussed in depth on this site taking a Pension Lump Sum only, so we will discuss some of the more technical points you need to consider when taking an income.

Unlike an annuity where you exchange all of your pension fund (after any pre-commencment lump sum) for a monthly income, the Drawdown contract will allow you to take an income directly from the drawdown pension fund. The rest of the fund remains invested and hopefully, with prudent fund management, it will continue to grow. Of course your fund could also lose money thereby eroding your income in retirement.

In April 2011, the Government changed the rules on the income you could take from a Drawdown contract. Very simply, if you have over £20,000 income per annum coming from other pension sources then the income you take from your income drawdown contract is classified as "Flexible". This is known as the Minimum Income Requirement (MIR) for more details please see below.This means the the Government Actuary’s Department (GAD) rules (discussed below) don't apply and you could take as much income from your fund as you wished. However it should be remembered that any amount taken will be treated as earned income and therefore taxable. This could push you into higher rate tax.

If you feel you will qualify for Flexible Drawdown please make sure you fully understand the Minimum Income Requirement.

For those people who do not have £20,000 per annum from alternative pension sources, the income you take from a Drawdown contract is classified as "Capped". In this situation you must abide by the GAD rules. In our experience most customers would not qualify for "Flexible" Drawdown.

The government sets limits on the minimum and maximum amounts you can take from your drawdown fund, depending on your age. The limits are set by the Government Actuary’s Department (GAD) and indicate what percentage of your pension fund can be taken as income, based on your age. Don’t worry, your Drawdown provider will calculate all this for you, although the tables are available to download from the Government Actuary Department if you are interested.

The amount you can take is specified as a percentage of Government Actuary’s Department or GAD. Once set, you have a choice about how much of GAD you want to take within a specified range. The range goes from 0% GAD to 120% GAD.

This means that if the GAD table indicated that, based on your age and the size of your Drawdown pension fund, you can take £1,000 income per month, then you can select anywhere between £0 per month (0% GAD) or £1,200 per month (120% GAD).

If your fund allowed for £1,000 per month to be paid, but you only needed £400 per month, we would set your initial income level at 40% GAD. You can alter this amount each year. Most providers review your overall GAD entitlement every 5 years. This review could result in the income you are taking either increasing or decreasing. This will mainly depend on the value of your fund.

You cannot add any un taken income in one year onto the income of another year. For example, if you could take an income of £900 per month but only chose to take £400, you could not add the £500 per month onto the income you took in the next year, i.e. If 120% of GAD in the following year was £1,200 per month, you couldn't take that plus the £500 that you didn't take in the previous year.

Minimum Income Requirement (MIR)

To qualify for and use flexible income drawdown you must :

• have a minimum income secured through other pension means of at least £20,000 pa. Income taken under this option is also taxed at your highest marginal rate.
  
  
• have paid no contributions (or had any contributions paid on your behalf) in the same tax year in which flexible drawdown is to be taken.
  
  
• to be eligible you must also not be an active member of a defined benefit or cash balance scheme. Contributions made into a money purchase scheme, made in the same tax year as the election to use flexible drawdown will be subject to an Annual Allowance tax charge taxed at the highest marginal rate, resulting in no financial gain.

If you do not meet the criteria above your Income Drawdown contract would be classified as "Capped"

Drawdown can be an excellent solution for many people, and we have many clients on our books who have used it to make a major impact on their lives.

It is not however an ideal solution for everybody and you must ensure you fully understand all the risks before taking an irreversible decision. If in any doubt whatsoever we strongly recommend you use our advice service.

While you may have heard of Income Drawdown, you may not be aware of all its features and uses.

We get many people visit this website looking for further information about income drawdown. Below are some of the questions that have been asked and our responses to them. Please note that these responses shouldn't be taken as personal financial advice based on your circumstances. Furthermore legislation and pension rules may change over time.

We apologise if some of the questions appear a bit repetitive, but we do want to give our customers the best chance of finding the exact answer to their question. Just click the question that is the closest to the one you want to ask.

What information is required to get a drawdown quote ?

We don’t need much information at all to provide you with a bespoke income drawdown quote. At a very basic level all we need is a date of birth, a fund value and an email address to send the quote to. However the following would be helpful in producing a more meaningful quote :

• The date of birth of any spouse or civil partner
• If you want to take an income or not
• If you want to take your tax free pension lump sum
• The age when you think you might want to cash in the fund and buy an annuity (if at all)
  

Should I take my tax free lump sum or income drawdown ?