May 18, 2020
When you come to retirement you’ll be faced with many options to take your pension income. The two main options are drawdown and annuities.
Since pensions freedom came into force and with gilt rates and interest rates low annuities have fallen out of favour in preference for income drawdown.
Income drawdown allows your pension to remain invested and you get to choose how much income you would like to take from that pension. This provides more flexibility with your pension income.
An annuity provides a set secure level of income that is based on your life expectancy. With drawdown it is you that is choosing the level of income and therefore it is important that the rate of return into the pension is more than the income you are taking. If not then you will eat into the capital.
Due to this there is more investment risk with drawdown, however it provides the ability to be able to take higher levels of income over annuities for periods of time and can make pensions more useful, by being able to vary income levels, potentially take a higher level of income, retire earlier, take lump sums and also pass your pension onto your loved ones.
How is it taxed?
Drawdown is taxed like any other pension; 25% of the fund is tax free with the remaining 75% taxed as income tax.
Can you take a lump sum?
Yes. you can take any amount of money from the drawdown at any point. The key considerations how much tax you will pay and what you would live on if you run the fund out.
You do not have to take the 25% tax free lump sum in one go. Instead you can take this as a single lump sum or as smaller sums.
What happens on death?
On death the drawdown will pass to your dependants, this can be a wife partner or children. It can in fact pass multiple generations. If you die before the age of 75 then the drawdown is tax free for your dependants. If you die after the age of 75 it is taxable as income tax.
What are the risks?
As you are choosing how much you take from the pension if the rate of growth is less than the income you are taking you will eat into the capital. If this continues over a longer period then you will run the pension out.
The money is invested and therefore will be subject to investment risk.
It is therefore important to take advice on the investment to ensure that it matches your objectives and risk profile.
To discuss drawdown contact us.