Keeping control of your investments

Income Drawdown (or Unsecured Pension) is the name given to the facility that enables you to continue to keep your retirement savings invested and take an income each year rather than buying an annuity. This facility can only be continued to age 75, with transitional rules in place from 22 April 2010 to 5 April 2011 increasing the age to 77, at which time an annuity has to be bought or the money transferred into an Alternatively Secured Pension (ASP). From 6 April 2011, the rules will change again. The government is currently running a consultation on the new rules to apply from this date.
Income drawdown is an alternative to an annuity. It allows you to draw an income directly from your pension while the fund remains invested. One of the most attractive features of income drawdown is that you keep control of your investments and choose the level of income you draw (within limits).

You continue to manage and control your pension fund and make all the investment decisions. Providing the fund is not depleted by excessive income withdrawals or poor investment performance, it may be possible to increase your income later in life.

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 per cent 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 five years. After each review you will be advised of the new annual GAD limit, which could be lower or higher than the limit from the previous five years.

A review will also be triggered if you add more money into your drawdown account from your main pension fund or if you take money out to buy an annuity. Each year you may request that a review takes place on the plan anniversary. This will restart the five-year period. In some cases, funds may also have to be moved out as a result of a divorce court order and this will also trigger a review.

You decide how much of your pension you want to move into drawdown. You can normally take up to 25 per cent of this as a tax-free lump sum and draw a regular income from the rest. There is no minimum withdrawal amount, so you could choose zero income if you wish. Any income is subject to tax at source, on a Pay As You Earn (PAYE) basis. You decide where the remainder of the fund is invested and you should review and monitor the situation regularly.

The maximum income you can draw can be more than the income from a level, single life annuity bought using the same fund. The maximum is calculated at the start of your drawdown plan, using GAD tables that use your age and 15-year gilt yields to calculate the income available from your fund. The income limits calculated at this point are fixed until the next review, although you should review any income you take more frequently.
As long as you stay within the maximum limit, you can control how much income you take and when you take it.

You always need to be aware of the risk that your income withdrawal can deplete your capital. This reduces the capacity for income in the future.

If you smoke, or suffer from ill health, an annuity income could be higher than the GAD limit allowed under income drawdown, as the GAD calculation does not take health or lifestyle into account.

You can use your income drawdown fund to buy a lifetime annuity. If you want to continue drawing an income directly from the fund when you reach your 75th birthday it can continue into an ASP, although income is restricted and death benefits are severely limited. The fund is automatically moved to an ASP if you have not set up an annuity by age 75.

You also need to consider when using income drawdown that your capital is not only being eroded by income withdrawals but is also exposed to market movements. In the worst case scenario your pension fund could be eroded, meaning you have little or no private money to live on in retirement.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. Thresholds, percentage rates and tax legislation may change in subsequent finance acts.