Do you want a higher Retirement Income and improved Death Benefits?
Is your Pension fund worth more than £150,000? If the answer is 'yes' then you should be looking at all your retirement options instead of just purchasing an annuity. One of these options is Income Drawdown. Income Drawdown is when your pension fund remains invested as it has done since you first started saving for your retirement. Your pension fund still benefits from fund growth that is tax free within the pension wrapper. All you are doing is drawing an income from your pension fund at the same time. |
 |
You can start drawing an income from the age of 50 from a Personal Pension Income Drawdown plan( Age 55 from 2010). The amount of income that you can take is determined by your age, sex and fund value, the rates applied are taken from the Government Actuary's Department(GAD) tables and are reviewed every three years.
You can take an income at the maximum allowed, which is approximately the same as a single life, level annuity would pay you. The minimum income you may take is now Zero. Therefore you could decide to take your 25% tax free cash and No income initially, and start taking your income at a later date.
Below you will find a comparison of the maximum income you can take from your Income Drawdown plan, against the best income you can take if you elect to set your annuity up with a 50% spouse's pension, or on a single life basis.
|
||||||||
The example above is for a Male, Age 55 with a Personal Pension fund value of £150,000 ( after tax free cash has been taken) The annuity figures above assume a 10 year guarantee, with no escalation, paid monthly in advance, spouse age 55. |
With Income Drawdown you must take your tax free cash at outset, if you do not take it at outset, you will lose the right to take it at all. If you do not require your tax free cash then you should be looking at the retirement Option Phased Drawdown which is described to you on the next page.
The major reason why people are considering Income Drawdown over purchasing an annuity is due to the death benefits. If you die while in Income Drawdown your remaining fund that is still invested is passed to your wife or your estate. Your wife has a number of options she can consider at this time:
- Carry on drawing an Income
- Take your fund as a lump sum less a tax charge of 35%
- Buy an annuity with the remaining fund
Taking the remaining fund less a tax charge of 35% from an Income Drawdown Plan is considered a very attractive option compared to the benefits an annuity gives your spouse. If you choose to purchase an annuity you have to decide at outset whether to have a spouse's pension attached to your annuity. This will mean that your annuity income that you will receive will be considerable lower than if you chose not to have a spouse's pension included. With Income Drawdown you can still take the higher income, and have the death benefits attached at the same time.
It is important to remember that Income Drawdown is not appropriate for everyone with a fund value over £150,000. Income Drawdown has a number of very beneficial features, but these must be weighed up against the possible risks that you must also be aware of. It is important that you seek Independent Financial Advice before you decide to enter an Income Drawdown plan, we can provide this service to you by completing the SIPP request form.
It is important to consider the critical yield A figure before entering the Income Drawdown plan. This figure expressed as a percentage will tell you how much your pension fund needs to grow each year, in order to keep pace with the annuity that you could have purchased at retirement. If your plan does not achieve this fund growth then you could actually end up with a lower income if you eventually decide to purchase an annuity.
The good news for most people is that from 6th April 2006 they have removed the need to purchase an annuity at age 75. People who enter Income Drawdown will be able to continue drawing an income as before, and will have the ability to pass on their pension fund to their family and friends via the Family SIPP route. If you would like to know more about this please get in touch and we can talk to you about it.
There are other risks that you need to be aware of before making your decision.
Firstly there is no guarantee's that your Income Drawdown fund value will benefit from fund growth, this could lead to your fund being worth less in the future.
Secondly annuity rates could get worse in the future, and therefore delaying your annuity purchase could mean you get a worse rate than when you retired.
The best way to enter Income Drawdown is via the SIPP Income Drawdown route. The reason for this is that you will have more investment freedom to invest your pension money in the many different assets that are available to you. More on SIPP's can be found further back on our website.
To find out whether Income Drawdown is right for you, please take some time to complete our SIPP Enquiry form. We will be happy to provide you with advice and a quotation on receipt of the enquiry.
