What is Pension Income Drawdown?

I was looking at buying an annuity but someone said another option is drawdown, what is this and how does it work?

Question asked by Zoe Hruska
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Answered by Andrew Jenkinson

Income drawdown is basically a way of taking an income from your pension. Provided you are aged 55 or over, you can use income drawdown to take as much or as little from your pension as you want, when you want.

An annuity is an income for life, which you buy from an insurance company in exchange for your pension pot.

Income Drawdown and Pension Freedom

The Pension freedom legislation introduced in April 2015 has provided additional flexibility with this option. There are effectively two elements to the payments from the pension drawdown arrangement. One is the tax-free element and another is the taxable element.

To work out how long your pension pot will last with income drawdown, use our Pension Drawdown Calculator here →

Pension Tax Free Lump Sum

Up to 25% of the accumulated fund can usually be taken tax-free – this can be in the form of a single payment or a series of payments. The remaining 75% when taken is subject to Income Tax (at your marginal rate). Again, this can be taken as a single payment or a series of payments.

Careful tax planning should be considered when taking funds from a pension income drawdown plan to ensure you do not overpay tax.

Pension income drawdown tax

When you die, any money that is left over can be passed to your beneficiaries, although they may have to pay tax, depending on how old you are when you die.

Read more on drawdown pensions and inheritance tax here →

Bear in mind that with income drawdown your income is not secure, and could run out too quickly if your investments don’t perform as you’d hoped, or you make too many withdrawals.

To figure out how long your pension could last if you choose income drawdown, the Drewberry Pension Drawdown Calculator can help.

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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.
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