Pensions & Annuities - Pensions Drawdown

Income Drawdown is the name given to the facility to continue to keep your retirement savings invested and take an income each year rather than buy an annuity. This facility can only be continued to age 75, at which time an annuity has to be bought or the money transferred into another type of annuity called an Alternative Secured Pension (ASP).

The income that can be taken from a drawdown arrangement can be varied each year between a minimum and a maximum. The minimum is £0 and the maximum is 120% of a pension calculated according to tables produced by the Government Actuaries Department (GAD). These tables are based on the amount your fund would buy as an annuity based on your life only and with no allowance for any future increase. The maximum amount needs to be recalculated every 5 years.

The main advantages of Draw-Down are as follows:

• Provides the ability to take 25% tax free cash without taking an income that would be taxed – this may assist tax planning as money left in is able to benefit from tax pension tax advantages
• May be used to provide flexible ‘phased retirement’ whereby the investor can fund for tax free cash over a given period
• Delays buying an annuity when the investor believes that interest rates are unduly low – annuity rates tend to improve with age
• Retains the ability to keep funds invested in the manner that suits the investor and allows for an annuity to be taken when conditions are more attractive
• On death before age 75 capital may be left to spouse or dependant either as a lump sum after 35% tax is levied or as an annuity or continuing draw-down

Some disadvantages are as follows:

• Interest or annuity rates may fall in the future due to general interest rate and mortality rate trends leading to a lower pension in payment
• The invested fund may fall in value leading to a lower pension in payment

Existing Drawdown Schemes

If you are invested into 'draw down' the last few years will have severely tested your investment strategy. How have you fared? Has capital kept pace after income withdrawal or has its value been depleted?

Many 'draw down' and investors in SIPP's and SSAS's or other pension schemes might benefit from a complete appraisal of their existing investment strategy. This can only be done on the basis of specific information relating to your risk profile, and when retirement is expected.

The purpose of our appraisal will be to:

• In the case of 'Drawdown' in payment : to ensure that income is achievable in a manner that is not detrimental to capital values and Where funds are invested to achieve growth awaiting the pension date, funds are invested according to the correct risk/reward profile and target growth
• Select specific fund specialists in various market sectors to provide maximum growth potential

The importance of correctly balanced sector investment and risk profiling may be found here.