This is a way of generating an income whilst not committing a pension fund into an annuity straight away. A drawdown pension or Unsecured Pension (USP) allows the 'draw down' of income whilst the fund remains invested.
The amount your client can draw is usually subject to limits set by HMRC. This is referred to as Capped Drawdown.
If your client can prove that they have sufficient pension income (guaranteed for life) to meet a minimum income requirement, they will be able to take unlimited drawdowns. This is referred to as Flexible Drawdown.
Why consider a Drawdown Pension? Whether a Drawdown Pension is the right option for your client will depend on the answers to a number of questions including:
- What is the minimum income that the client requires and what fund size will be needed to support this (within the constraints of their attitude to risk)?
- When looking at guaranteed (lifetime annuity) versus variable options, what choice can your client make given their financial circumstances?
- Would phasing annuity purchase help your client?
- Would they qualify for an enhanced annuity and, if so, what difference would the higher annuity income make to the advice you give your client?
Some Pros and Cons of Drawdown Pensions
Drawdown Pension
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Pros
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| Flexibility about when and how much income can be taken (subject to limits set by HM Revenue & Customs) |
There is an element of risk - annuity rates may fall and the pension fund could decrease, which could mean a significant decrease in future income
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| The commitment to buying an annuity can be delayed. |
Our research from 2008 suggests only larger fund sizes (£300k+) would survive a prolonged fall in investment performance.
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| Annuity rates could improve, allowing time for pension funds to potentially grow. |
It is generally agreed that total funds should be a minimum of £100k before a Drawdown Pension is considered |
| Any future annuity purchase can be tailored to reflect the circumstances at that time. |
HM Revenue & Customs limits the amount of income drawn from a pension fund. |
On death, the remaining fund can be returned subject to a tax (currently 55%), or used to buy an annuity, unsecured pension or a Drawdown Pension for a dependant.
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Fees will usually be charged for administration and investment management and the costs associated with these arrangements can be high.
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Be aware of the risks - annuity rates may fall and the value of pensions could go down, meaning a decrease in future income. |