What are the benefits of using income drawdown?

22nd May 2012

For some people the idea of investing the majority of your pension pot into an annuity is not something they want to do, in fact the idea of giving all of a person’s pension money to an annuity provider who could then possibly keep it after only a few years if the person was to die unexpectedly can prove uncomfortable for some investors and as such, they tend to go for another option when dealing with retirement income.

Income drawdown is a popular choice,  particularly for people who have a slightly larger pension pot and are experienced investors. Instead of investing your pension into an annuity fund, you can continue to invest your pension in an existing manner and draw a certain amount of income from it each year. If you were to die unexpectedly then the remainder of your pension pot could pass on to any dependents you have, subject to a 55% tax rate.

How does income drawdown work?

Income drawdown  enables you to draw income directly from your pension pot and therefore the income you receive depends on both the performance of the fund and the income levels stipulated by legislation.  If the pension pot is exhausted, the pension will stop.  There is also the potential risk that your pension pot could decrease as it remains invested, depending on how the market performs. Income drawdown gives you an increased amount of flexibility with your retirement income and allows you to keep control of your money, but does not provide you with the security that you would often come to expect from a  guaranteed annuity.

Why would I choose this option?

There are a number of benefits that you could find from choosing the income drawdown option over buying a standard annuity and some of these include:

  • Immediate access to your tax-free lump sum without having to make an investment or draw an income
  • You will have increased control over your money and could benefit from a higher rate of investment
  • Income drawdown can give greater death benefits to your partner or dependents, especially in the event of an unexpected death
  • It can help you to work in your tax effectively.
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