What is income drawdown?

A friend told me I should think about ‘income drawdown’ now that I’m in my late 50s. I thought my company pensions would take care of me and my wife when I come to retire. What is income drawdown and how can I tell if it’s right for me?

Question asked by Mr G H Kahn
Are You Pension Happy?
Call us on 02084327334
I know how much my pension is worth
I know how much my pension costs
I have clear financial goals for my retirement

Answered by Stephen Moore

Income drawdown has been around for a long time…

Income drawdown isn’t new. It was introduced in its earliest form in 1995. Having been given an overhaul with the new pension freedoms in April 2015, income drawdown lets you take control of your pension pot by keeping it invested in the markets and creating your own programme of lump sum withdrawals and income payments.

Pension drawdown provides a means to pass on your pension wealth to your chosen beneficiaries in a tax efficient way and, thanks to its flexibility, income drawdown can also create opportunities to reduce your tax bill in retirement.

Making the most of pension freedom

The latest incarnation of income drawdown is called flexi-access drawdown. It replaces the two previous types of contract known as ‘flexible’ and ‘capped’ drawdown. It was introduced as part of the sweeping new ‘pension freedoms’ that came into force in April of 2015.

For many people with generous final salary scheme benefits, the additional freedoms available and the abolition of the former 55% death tax were a tipping point. There’s already been a noticeable increase in the number of pension transfers and enquiries as a result.

There are now a combination of factors that are prompting pension savers to investigate a transfer of their final salary benefits. The first is the increased flexibility that’s been conferred by the new regime.

The second is probably the tantalising transfer values that are often now in evidence from final salary company pension schemes. The third is that a transfer can transform your hard-earned final salary benefits into a significant financial asset and let your beneficiaries inherit your pension should you pass away.

Once you have your pension pot in the defined benefit regime – in a personal, stakeholder or self-invested personal pension (SIPP) – you can use the new income drawdown rules to do any of the following things:

  • Take up to a quarter of your pension pot as an immediate, tax-free lump sum (or more if you have a protected lump sum) and invest the rest to provide an income either now or in the future
  • Take all of your pension pot in cash. The first 25% will be tax free and the rest subject to your marginal rate of income tax
  • Take a series of ad hoc lump sums whenever they might be needed. Each of these will be 25% tax free with the rest subject to your marginal rate of income tax. This ‘alternative’ drawdown route is known as an uncrystallised funds pension lump sum or a UFPLS. More colloquially, it’s also been referred to as a ‘FLUMP’
  • Leave all your pension pot invested until you need it
  • Draw down a regular, taxable income 
  • Begin drawing benefits from any age after 55 (or earlier in the case of ill health)
  • Still save up to £4,000 pa into your pension plan (even after you’ve started to draw the benefits).
flex-access drawdown
 
income drawdown
 
new pension freedoms
 
retirement planning
 
This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
Start your journey today...
  Find out how a Drewberry financial adviser can help you reach your destination by making the most of your finances.
Call us on 

Frequently Asked Pensions Advice Questions

 
I’ve had a with-profits pension for sometime and it’s value hasn’t really changed....
 
My pension says it has a guaranteed annuity rate, what does this mean and is there anything I should...
 
I bought my annuity before the start of the pension freedoms and now they’ve been introduced I...
 
I’m worried I won’t have enough money in my pension savings when I stop working, so I’m...
Need Help? Live chat now and get an instant answer from our Experts...

Neil
Pensions

Victoria
Insurance
Our Latest Reviews
Jayant Rampuria
06/10/2018

Oliver did an excellent job in making the right recommendations. He's been very patient in dealing with my request and helping me choose the right product. Well done and thanks very much!

James Mclauchlan
05/10/2018

Josh did a great job. Did all the legwork for me in getting the best quote and even handed it over to someone else whilst he was away, then finished the whole thing once he was back – impressed!

Raviteja Sajja
02/10/2018

Josh was very good at communicating about different options for Life insurance, advising us on right choice and benefits. I would strongly recommend Drewberry. Thank you Josh.

We are rated 4.9/5 based on 1742 independent client reviews.
To read more of our independent client reviews click here →
REVIEWS
EXCELLENT
4.92 / 5 Average
1831 Reviews
A Lovell
Overall Rating
Extremely helpful and able to understand the various issues and constraint
D at Inforcehub
Overall Rating
Very knowledgeable and easy to deal with.
A Kanwal
Overall Rating
Bronja Whitlock was absolutely brilliant, as my mind isn’t in the right place at the moment due to the loss of my partner and I forgot who my insurers were or if I was covered. I therefore contacted her from an old email that I had from a few years just explaining my situation. I wasn’t expecting a response to be honest, but Bronja replied back the same day. She didn’t just reply with the most empathising response, but she also contacted the insurance company and told them of my situation and ordered my claim pack on my behalf, which I can’t appreciate enough. Bronja Whitlock you are an asset to your company. Thank you.
R Sajja
Overall Rating
Josh was very good at communicating about different options for Life insurance, advising us on right choice and benefits. I would strongly recommend Drewberry. Thank you Josh.
S G
Overall Rating
Rauri has been very professional and has responded promptly to any queries. Very friendly nature too