Anthony Burgess (Pension & Investments)

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Products Updated June 11, 2018

Best Income Drawdown Pensions

Our pension experts have selected their top choice of pension providers for income drawdown. Visit the providers below to learn more about fees, funds and investment options. Applying is made easy direct on their website.

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All you need to know about Income Drawdown Pensions

What you need to know about Income Drawdown Pensions

What you need to know about Income Drawdown Pensions

When it comes to deciding how much income to take from your pension, and where to invest your funds is not an easy task. It should be carefully considered and planned to help you get the most from your money. Income drawdown pensions have been growing in popularity in recent years, and they allow those who are entering retirement to take full control of their pension savings and choose how they are invested.

What is an income drawdown pension?

Income drawdown is a method used to provide you with regular retirement income from your pension pot. It works by reinvesting it in funds that specifically managed and designed for this exact purpose.

It offers a flexible way of taking money out of a pension to live off of during retirement, and unlike other options, income drawdown pensions allow you to take as much income as you want when you need it the most. Many other pension offers pay a fixed income for the duration of your retirement, providing little flexibility. 25% of your pension savings can be taken as a tax-free lump sum, and after this income drawdown pensions allow you to take regular monthly or annual payments or a series of lump sum payments as when you choose. This gives you full freedom and flexibility over how you use your pension savings and allows you to access your pension fund when you need it the most.

When using an income drawdown pension your pension pot stays invested, and you have total freedom over where to invest your money. It is important to remember that the income you receive will be affected by the performance of your investments, and while they could increase over time, there is also a risk that they can decrease.

Types of income drawdown pensions

There are two main types of income drawdown pensions:

Flexi-access drawdown

With flexi-access drawdown, you will reinvest your pension pot into funds that are specifically designed to provide you with a regular income during your retirement. The income will vary depending on the fund’s performance, and there is no guarantee how long it will last. You have the freedom to choose the funds you want to invest in and set the income you want to receive, this income is then adjusted regularly depending on the performance of the investment.

The amount of money taken from your pension pot will be classed as your income for the year and taxed as such, this means if you withdraw a large amount you may be pushed into a higher tax band.

Capped drawdown

Capped drawdown pensions are no longer available and were closed to new applicants on 6 April 2015. It was a way of getting an income from your pension and the money in the pension pot was invested in funds that paid an income.

If you already have a capped drawdown set up, it will continue to operate under the existing rules. If you exceed the drawdown cap, which is the amount of pension savings on which you can get tax relief, then you will be moved to a flexi-access drawdown pension. Once you exceed the cap, you cannot go back to a capped drawdown. As of 6th April 2015, all new income drawdown pensions are set up as flexi-access drawdown.

Advantages of income drawdown pensions

  • Full flexibility and freedom is easily the biggest advantage of an income drawdown pension. They can be operated with the same principles as any other investment or savings account, giving you full flexibility over how to get your pension savings.
  • They can be operated in a tax efficient way and great for those with smaller pension pots that want to withdraw funds and minimise tax liabilities.
  • These types of pensions are not considered a part of your estate after death, meaning it is not subject to inheritance tax and is instead taxed at the beneficiaries’ rates of income tax.
  • Your pension pot is continuously invested and has the chance to increase during your retirement.

Disadvantages of income drawdown pensions

  • If income drawdown pensions are used alongside other methods of income such as part-time work, you can push yourself into a higher-rate tax bracket and end up paying more tax from your pension.
  • Your pension pot is continuously invested and can be at risk of reducing if the investment fails.
  • There is no guaranteed annual income from income drawdown pensions and no guarantee that your pension pot will last the full length of your life.

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