Income Drawdown
Income Drawdown offers a flexible alternative to an annuity for those individuals who are comfortable with taking some risk with their money in retirement.
Essentially on reaching retirement an individual can elect to invest their pension fund in a drawdown arrangement where their monies remain invested in various fund types such as property, bonds, cash and equities as they are typically invested during the life of the original pension.
The drawdown plan can provide an income from zero to 125% of a typical annuity income depending on the individuals needs and this income can be changed at any stage.
Recent changes in pension legislation now define those in a drawdown plan as those who are in an “unsecured pension” (if they are below age 75) and those in an “alternative secured pension” (if age 75 or above).
An individual, who is age 75 or above, has a limit on the income that can be taken of 70% of the typical annuity rate available at that time.
Upon death of an individual in drawdown before age 75, the surviving spouse has 3 options:
- they can purchase an annuity
- or continue with the drawdown plan
- or take the fund as cash less a tax charge of 35%.
In most cases the fund is exempt from Inheritance tax.
If death occurs after age 75 the surviving spouse has the same options although the tax charge is increased to 55%. The fund is also liable to Inheritance tax of 40% (if applicable).
In reality there seems to be few pension providers that actually allow their scheme to pay out the fund as cash less the tax charges after age 75.