Drawdown
This is where you do not buy an annuity. Instead you take your tax-free lump sum and leave the rest of your pension pot invested in the stock market. You take an income each year direct from your fund within levels laid down by Her Majesty’s Revenue & Customs (HMRC). If the investments in your pension fund do well, you can take an increasing income (within HMRC limits). However, if they do not perform well enough, your fund may reduce, forcing you to reduce your income.
Capped or flexible?
If you have guaranteed pension income of £20,000 a year or more (known as the Minimum Income Requirement) you can take as much as you like from your pension savings, subject to income tax. This is known as flexible drawdown.
If you have less than £20,000 a year in guaranteed pension income you can still leave your pension savings invested and take an income directly from them but you are limited to an amount that is roughly the same as an annuity. This is known as capped drawdown.
If you die then either your husband, wife or partner can continue to draw an income direct from the fund, buy a lifetime annuity or the fund can be returned to them less tax at 55%. There are two big decisions about drawdown.
Is it right for you?
To help you decide we work out what return you need to achieve each year on the fund to be able to continue to draw an income that is equal to the guaranteed annuity you could take from the beginning. We work this out by finding out the best annuity rate that would be available to you – taking account of your medical history if appropriate and then working out the return needed to match it. The higher the income you could get from a lifetime annuity, the bigger the investment returns you will need.
Does the type of investment needed to meet this yield fit with your own attitude towards investment risk?
If you decide this is the right option for you and that you are happy for your income to go down if the return is not achieved, we can recommend you to a firm that specialises in managing investment funds for drawdown. You can decide who you use to manage your fund but we believe this is a highly specialised area and our expertise is in the technical aspects of drawdown – not managing investments.
