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Income Drawdown (or Unsecured Pension as it is officially known as) is a flexible way of drawing retirement benefits for those with larger pension funds (typically over £100,000), and who are happy to take a higher risk with their pension fund in order to take advantage of the additional flexibility Drawdown brings.

Tax free cash is available and taken at outset in the same way as with an annuity, and then the remaining fund is invested. An income is then drawn from the fund, which can be varied between £nil and what is known as maximum GAD (it is known as this because the figures are provided by the Government Actuarial Department).  The maximum income is designed to be the same as that available from a single life annuity, but in reality is usually around 10-15% higher.  If you do not require any or all of the tax free cash to which you are entitled, then Phased Retirement allows you a tax efficient way of mixing tax free cash and taxable income.

The value of the pension fund will fluctuate, rising where the growth of the underlying investments is greater than the income taken plus any charges, and falling where the investment return is lower than income plus charges.  It therefore carries a higher risk than an annuity, and is only suitable for those who are happy to accept this higher risk.

The critical yield is a key factor when determining whether to choose an Income Drawdown arrangement over an annuity.  This measures what the underlying investments of a Drawdown need to grow by each year to ensure you could still buy an annuity of the same level in the future (usually measured to age 75, where under current legislation an annuity or Alternatively Secured Pension needs to be purchased).  The higher the critical yield, the more aggressive any investment strategy needs to be, and the less likely the prospects of the required investment return being achieved.

Income Drawdown provides a great deal of flexibility with regards to income levels and death benefits.  Income can effectively be increased and decreased within the minimum and maximum permitted levels at any time, and these levels are reset every 5 years.  Unlike an annuity, where death benefits such as dependent’s pension, guaranteed period or capital protection need to be built in at outset, with Income Drawdown no such decisions need to be made at outset.  Should someone die whilst in Income Drawdown, their dependent has three options:

  1. They can choose to continue with the Drawdown arrangement themselves utilising 100% of the remaining fund.
  2. They can convert 100% of the remaining fund to purchase an annuity for themselves.
  3. They can opt to receive a lump sum, but this is subject to a 35% tax charge.

Income Drawdown provides a great deal more flexibility and death benefits than other retirement options, but it does carry with it a higher level of investment risk.  It is therefore a decision that should be carefully considered.

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