On retirement, a member of an occupational defined contribution, personal or stakeholder pension who needs retirement income has two choices:
1. exchange some or all of their pension fund for an annuity or
2. leave some or all of their fund invested.
Where the fund is left invested and the individual draws an income from it, the arrangement is known as ‘Income Drawdown’ or ‘Pension Drawdown’. (It is still possible under an income drawdown arrangement to take 25% of the pension fund as a tax-free lump sum, but that must be done at the outset of the arrangement or the right to do so is lost forever.)
Take income directly from the pension fund
Rather than buying an annuity, an individual can elect to leave their pension fund or funds invested in an arrangement known as a ‘drawdown pension’. There are three variants of a drawdown pension: capped drawdown, uncapped (or flexible) drawdown and phased drawdown.
Capped drawdown — restricted withdrawals
• The option is available from age 55: there is no upper age limit • The maximum amount of income that can be drawn each year is about the same as a level annuity would pay for a person of the same sex and age • Up to 25% of the fund can be taken as tax free cash in the normal way • It is not necessary to draw any income at all • The maximum income limit — which takes account of age and the size of the pension pot — is reassessed every three years for individuals aged 75 and less and once a year for those over 75 years of age
Flexible drawdown — unrestricted withdrawals
• The option is available from age 55: there is no upper age limit • The individual must be in receipt of a minimum and guaranteed income of £20,000 a year • Up to 25% of the fund can be taken as tax free cash in the normal way • What remains of the fund can then be withdrawn in its entirety or part withdrawals can be made as and when the individual likes • Withdrawals are subject to income tax at the individual’s highest rate • The individual can make no further contributions to a pension or join a final salary scheme
Phased drawdown — available to individuals who do not wish to exercise their right to take a tax-free lump sum of up to 25% of the fund.
On the death of the individual, the value of the remaining pension fund can be paid as a lump sum to dependents or used to purchase a lifetime annuity or the beneficiaries can establish their own drawdown pension and start to receive income from it. Beneficiaries who are not dependents can take the lump sum subject to a HMR&C recovery charge of 55%.
How we can help you decide
Taking income from an Income Drawdown plan is extremely flexible, in that you can decide the level of income you require (between nil and the maximum) and you can adjust the level of income at anytime.
There are many income drawdown calculators that can be found various websites. These calculators let you quickly calculate the maximum amount of income that you are allowed to take from your pension plan using the Government Actuaries Department (GAD) rules.
Income Drawdown Calculator
Use our Income Drawdown Calculator to find out the maximum monthly income permitted under the GAD rules. Simple to use, the Calculator will help you find the maximum pension drawdown income that you are allowed.
On the 6th April 2011, two new forms of ‘drawdown’ were introduced replacing the old type – Capped Drawdown and Flexible Drawdown.