Income drawdown is where you leave your pension pot invested and take an income directly from it, instead of using the money in your pot to buy an annuity from an insurance company. As the rest of your pension pot remains invested, it will continue to benefit from any investment growth.
Since pension reforms were introduced in April 2015, more and more retirees have opted to take flexible withdrawals from their pension funds, and the Financial Conduct Authority has reported that drawdown has become much more popular, with twice as many pots moving into drawdown than into annuities.
UNDERSTANDING THE RISKS
Whilst drawdown offers great flexibility, there are risks that you need to be aware of. Unlike an annuity, the amount you could draw as income isn’t guaranteed. Your pension fund remains invested which means that you are exposed to share price movements as markets rise and fall. This makes it even more important to take good independent professional advice. Without it you could find your income level falls and you might even risk running out of money at some point.
In drawdown, there are risks involved both in taking out too little and too much. If you draw too little you might not have sufficient to cover your living expenses, taking out too much could have tax implications and also restrict your remaining pension pot’s ability to provide an income throughout your retirement. This is where your financial adviser can provide valuable input, helping you plan your drawdown strategy and ensuring that it’s kept under regular review.
Although it’s no longer obligatory to take an annuity at retirement, they still have benefits to offer. It is possible to put a portion of your pension pot into an annuity to provide a regular guaranteed amount for the rest of your life. Some people choose to do this to ensure.