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All about Drawdown

Pension Drawdown (Unsecured Pension)

Drawdown allows you to make income withdrawals direct from your pension fund instead of buying an annuity.

The Advantages

Drawdown has many advantages compared to investing in a guaranteed annuity including:

  • Income Flexibility - Each year the amount of income taken can be varied between the minimum and maximum limits. Income can also be taken monthly, quarterly, half yearly or annually.
  • Control over investments - If drawdown is set up through a Self Invested Personal Pension there is a wide range of investment options available.
  • Choice of death benefits - Unlike standard annuities where the only death benefits are available from a joint life annuity, drawdown offers a choice of death benefits.

The Disadvantages

The basic rules for drawdown are simple, but it is a complex option because of the risks involved.

  • The value of investments may fall in value
  • Annuity rates might fall in the future and there is no benefit from mortality cross subsidy
  • Any lump sum death benefits will be taxed at 55%

When you buy an annuity you give up control of your pension fund in return for a secure income. With drawdown you maintain control of the pension fund but your income will not be secure and so it is a much more risky option than buying an annuity.

Types of Drawdown

There are two types of drawdown plans

Flexible Drawdown

  • Investors who can meet the Minimum Income Requirements (MIR) of £ 20,000 per annum of secured income will be allowed to take unlimited amounts of income from their pension funds but this will be taxed at their marginal rate

Capped Drawdown

  • Available to everybody and allows investors to draw an income from their pension fund for as long as they like with no age restrictions. The maximum income will be 100% of the annuity rates without any age limit.
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