Many people are now choosing income drawdown as an option in their retirement planning. This is different to the traditional annuity which most people used to purchase – so here is a guide to pension drawdown, and how to work out whether it’s for you.
What is pension drawdown?
Put simply, income drawdown means your defined contribution (DC) pension is like a savings account. Whether or not you choose to claim your tax-free lump sum cash, you can withdraw money out of your DC pension whenever it’s required. The rest stays in your pension pot and means your investment can continue to grow.
What are your options?
You can withdraw as much or as little as you like, whenever you need it. Remember, you can only take the tax-free lump sum cash once you’ve reached 55 years or older. Some older pensions might not allow income drawdown. If this is the case and drawdown is what’s right for you, then you may need to consider transferring pension providers, or consolidating your pensions.
Things to consider:
If you move into drawdown, you need to think carefully about how you are going to manage your money over the coming years. Many people use an independent financial adviser to assist in this. First of all, you need to make sure that you do not withdraw too much. Even if you are unlikely to run out, remember that as your overall fund decreases, so will the amount of growth that’s added to it year by year. As you withdraw your pension, you need to keep track of what’s left. Remember, investments can go down as well as up, and so you need to ensure that the rest of your pension is invested sensibly.
Income drawdown vs annuity – what’s the difference?
Both pension drawdown and annuity allow you to claim your tax-free lump sum cash in one payment. After that, however, there are important differences.
If you purchase an annuity, this will secure you a guaranteed income for a set period of time or for the rest of your life. You will need to shop around for the best deal, confirm details, and consider options such as whether payments will continue to support your loved ones after you die. However, after that, there’s nothing to be done. The income is always there. Although this means it is secure, it also means you usually can’t cancel or change it if you change your mind.
If you choose pension drawdown, you have the freedom to decide your income level, and when you wish to withdraw money out of your pension pot. You can also potentially increase your income by investing (though this is not guaranteed). However, your income might not be secure and could run out.
Everyone’s circumstances and personal finances are different. You may wish to investigate all the opportunities offered by pensions freedom, especially if you have a defined contribution pension, and this includes income drawdown. For some, however, an annuity may be the better choice – and you could consider whether setting aside part of your pension for drawdown and part of it for an annuity might bring the best of both worlds.