Drawing your pension - Income Drawdown
When it comes to thinking about your retirement, the low interest rate environment, along with the past 18 months of stock market turmoil, may have you concerned about what you will get. Under normal circumstances you would look at your pension pot, compare a few annuity rates and choose the best one - but what happens when none of them seems to offer enough?
The good news is, there are now a number of options for you to consider to maximise your prospects. They took a very long time to build up so you should ensure you make the most of them.
One of the options available is known as income drawdown or more technically, as an unsecured pension. Rather than buy one of the annuities on offer right now, this allows you to defer your decision - but in the meantime, draw any level of income you like (subject to Government limits), direct from the pension fund itself. The rest stays invested until you decide annuity rates are more favourable - or until age 75, at which point your needs must be reviewed.
The main advantage of this option is the flexibility it provides. Subject to this Government maximum (defined by their Actuary and reviewed every 5 years), you can take whatever amount of income you need.
So, if you want to continue working, you could initially draw a smaller pension but increase the amount slowly as you reduce your hours. Or, you could take your tax-free lump sum but leave taking any income until further down the line. Alternatively, if you have a partner (particularly one who is relatively young and for whom annuity rates are very expensive), deferring the purchase of a joint life annuity could help improve the rate of income later on. In the meantime, you can also retain some control over how the money is invested.
There are drawbacks. On buying an annuity, the charges for pension provision normally stop. However, with income drawdown the charges continue because the fund remains invested. In addition, there are administration fees for carrying out regular reviews. These can mount up and need to be considered relative to the potential gains. In addition, because it remains invested in the market, the value of your pension could actually fall. Regardless, you only retire once so consider everything because you must make sure you make the right decision.
