You may decide that leaving your pension fund (or some of it) for the future is exactly what you want. For example, you may have an alternative source of income, or rather than giving up work, you may slowly reduce the hours you work.

In our experience most people will be clear on how they will deal with their tax free cash, and therefore this section will only focus on the options around managing your monthly pension income.

The first thing to remember is that if you are looking to take a smaller income which will increase over time, then an index linked Pension Annuity may suit you. The pension will start at a lower level and will increase each year with inflation.

If you are looking for a more sophisticated approach, then using a Drawdown contract could be the answer.

WARNING : Income Drawdown contracts are very sophisticated products and carry a significantly higher degree of risk than an annuity contract. See Income Drawdown Risk below. Our standard service is to offer Income Drawdown without advice. It is for the customer to decide if the product is appropriate to their needs and circumstances. If you are at all uncertain about income drawdown or if it is appropriate for your needs, we strongly recommend you seek financial advice.

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 therby 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 100% 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 £1,000 per month (100% 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 untaken 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 100% of GAD in the following year was £1,000 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"

For some people, particularly those with large pension funds, they do not like the idea of a conventional annuity where the entire fund is given to the annuity provider, because under certain circumstances, should you die, you run the risk of the remaining fund being lost to your estate.

The Drawdown option keeps the asset within your estate and within your control. If the fund is still in place at the time that you die, the fund value will pass to your estate. Depending on who receives the fund on death and how it used, will depend if and how it is taxed. If it is taken as a lump sum, based on current rates, it would be taxed at 55%. Nevertheless some people still find this an attractive option compared to losing all of the fund to an annuity company.

We do all the work for you in contacting all the providers, obtaining quotes and then ensuring all those quotes are on a like for like basis. Once we have done that we will present those quotes to you in an easy to understand information only pack.

Our aim is always to leave you in control while making the process for you as simple as possible.

We are always on hand at the end of the phone to update you on progress and answer any questions you may have.

We will of course recommend that you look at your current pension arrangements to understand if you have any special terms and conditions attached to it. If you do have such conditions you may still be able to switch providers if necessary, but at least you will have made a decision based on all the relevant facts.

Please feel free to call us on 0845 83 87 811 to discuss any aspect of your retirement planning.

You can contact us in a number of ways using the various forms on this website, or just call us on 0845 83 87 811.

If we end up using a standard annuity to achieve your goals, then there are no major risks as everything is guaranteed from outset.

A Drawdown solution may be a much better fit for your needs, but there are some important risks as well as some benefits. Please see below for more information.

You have significantly more control over the monthly income you receive as you can take anything between 0% and 100% GAD. Depending on your circumstances, selecting an income at either of these maximum or minimum limits could have a major positive impact on your longer term retirement planning.

If you meet the Minimum Income Requirment you could take any amount of income that you want, taxed at your highest marginal rate.

By keeping your pension invested, you have the opportunity to manage your investment options until you want to purchase an annuity. A good investment strategy could replace the amounts withdrawn from the fund.

At any point you have a number of options, including taking a full pension annuity or taking an increased or decreased income from the Drawdown fund. This does not apply if you select a drawdown contract that gives you a guaranteed maturity value in exchange for a fixed term.

Even if you don’t want to take full GAD as an income, you could consider taking full GAD and using any surplus monthly income to put into another personal pension. The advantage of this is that a personal pension is more tax efficient if you should die while it is still in place and you have the potential to take another Tax Free Cash lump sum from it.

If you die while the drawdown contract is in place, the fund will form part of your estate and will pass to your family. With an Annuity, the fund is lost. This may be mitigated to a degree if an annuity with a guaranteed pension or partner’s pension is selected. Depending on how your family use the fund, it may be liable to tax at 55%.

Risks

The following represent the key risks :

A pension fund is obviously intended to be used to provide money in your retirement. If you are taking money from your pension fund before retirement you may seriously erode any income you could expect to receive in retirement. For this reason some drawdown providers will not accept drawdown business if the fund is below a certain amount.

The fund in your drawdown contract is subject to investment market fluctuations. If the funds you select do not perform you could find that your fund has shrunk rather than grown. This again could have a negative impact on your retirement income.

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 wanted to take the fund 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.

Pension legislation keeps on changing. We have previously seen legislation introduced in 2006 and 2011. Both of these government bills had both 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.

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 stronly recommend you seek financial advice.