SIPPs - Pensions Drawdown

Pensions Drawdown also known as income drawdown, is an option to keep your pension fund invested and take a regular income rather than commit yourself to a pension annuity.

The pension drawdown can be varied annually between limits set down by law. These are currently a minimum of 0% and maximum of 120% of a standard pension figure calculated by annuity tables produced by the Government Actuaries Department. Whilst in a pensions drawdown arrangement the maximum amount of income will be recalculated in five yearly intervals.

You can keep your pension drawdown facility until age 75 when you have to either buy an annuity or transfer your pension funds into an alternatively secured pension.

Pensions drawdowns are often used to access a tax free lump sum without commiting to the purchase of an annuity.

What is Pension Drawdown?

Pension Drawdown is a facility that allows an investor to defer the purchase of their pension annuity whilst still drawing cash or income from their pension fund. In addition their pension fund stays invested for further potential growth.

Pension Drawdown Advantages

By using a pension drawdown arrangement the investor can use the rules to avoid commiting to an annuity or taking their pension fund out of investment. The investor can then seek to benefit from improved rates on pension annuities at a later date. If death benefits are a concern, a pension drawdown arrangement can be considerably more beneficial than the purchase of a pension annuity.

Death benefits

A surviving spouse or dependant has three options:

take a lump sum subject to 35 % tax
continue income withdrawal
purchase an annuity

Depending on the scheme rules/policy terms, a dependant's pension may be deferred until a later date.

Pension Drawdown risks

If investment performance on the fund remaining is poor, the level of income payable may reduce. Therefore there is no guarantee that the pension ultimately purchased will be higher than the amount that could have been purchased at outset.

Glossary

Pensions Drawdown – can also be known as income withdrawl
Annuity - An annuity is an insurance policy that provides an income
Tax Free Lump Sum – The element of a pension fund that can be withdrawn as tax free cash
Government Actuaries Department - A government department that provides actuarial advice and guidance to the government and public sector schemes

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