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Income Drawdown
An Income Drawdown plan allows you to take your tax free cash from your pension fund and taxable income direct from the balance of fund within the GAD limits at the time. This is also known as an Unsecured Pension, income withdrawal or pension fund withdrawal.
You have the option to purchase an annuity at any time with the invested fund.
This type of option is suitable for people who have a large fund usually over £100,000 and has the highest investment risk, as your investment will include equity based funds. This would be suitable for people wishing to defer taking their annuity or have another source of secure income such as a company pension.
The income you take from the fund must be reviewed every 5 years to make sure it is line with HM Revenue & Customs limits. You can draw an income from your fund up to a maximum income that is equivalent to 120% of the income you would get from a level single-life annuity for a person of your age and sex. There is no minimum amount.
The disadvantage with Income Drawdown could be that if you were drawing the maximum income from the fund at the start, you may have a lower amount left at the end (depending on growth) with which to purchase an annuity or ASP. You must also be aware of the fact that your pension fund may also fall as well as rise.
PHASED INCOME DRAWDOWN
This allows you to take an income from part of the fund leaving the remainder intact to grow. You can take your Tax Free Cash at intervals instead of all at once. If your remaining fund grows it means you could have a larger tax free lump sum than taking it all at once. This is particularly suitable for someone still working and paying tax or somebody working part time who does not need their maximum income.
This method allows you to vary the amount of income that you receive from your pension giving you flexibility in your changing circumstances. This has the added advantage that part of your pension fund has the potential to carry on growing in a tax favoured environment.
ALTERNATIVELY SECURED PENSION
An ASP would be purchased once you are over 75 and have decided not to purchase an annuity. This allows you to draw income from your pension fund between the minimum and maximum GAD limits. The funds in an ASP are invested in the same way as a USP and carry the same risk. In the event of death of somebody in full drawdown or ASP, the spouse would have a choice of doing any of the following with the remaining fund;
- Purchasing an annuity
- Taking the whole amount as tax free cash which would be subject to a 35% tax charge
- To take over the ASP income if over 75 as they would USP if they were under 75 and continue to receive the income as their spouse was receiving
