How does Income Drawdown work

Get Income Drawdown Quotes Now | Click hereIncome Drawdown is also referred to as Income Withdrawal, Pension Drawdown, Pension Withdrawal or Pension Release. It allows you to take benefits from your pension funds, from age 55 onwards, without immediately buying an annuity.

Taking the benefits from your pension before the normal retirement age of 60 or 65, is sometimes referred to as “unlocking your tax free cash”. Some people want to unlock their tax free cash early to use the funds to clear debts or repay a mortgage and the present rules allow you to do this from age 55. You do not have to stop work in order to take your benefits. You must bear in mind though, that by taking the tax-free cash (and any income) early you are reducing the funds available for when you retire.

You can usually take up to 25% of each amount you move into Income Drawdown as a tax-free lump sum, before leaving the remainder from which to draw a taxable income. The fund remaining will continue to be invested.

If you’re in a scheme that doesn’t offer Income Withdrawal but you want this, you can transfer your pension rights to a personal pension scheme. This will let you use Income Withdrawal. To get FREE no obligation advice, please fill out the form, and one of our specialist advisors will be in touch.

The Rules

On transferring to an Income Drawdown plan, you can immediately take a tax-free lump sum of 25% of the fund value and then take an income from the invested fund. To avoid the fund being used up too quickly, HMRC (HM Revenue and Customs) limit the amount of income you can take under Income Drawdown. Your income limit must be regularly reviewed. Because of the limit, this type of drawdown is referred to as Capped Drawdown.

It is not compulsory to take any tax-free cash and you can take less than 25% if you wish. However the tax-free cash must be taken at the time that the plan is set up.

Unlike an Annuity (a Secured Pension) you do not have to take any income. The maximum annual income that you can take is set by the Government Actuaries Department (GAD). You can, therefore, take any level of income between zero and the maximum on a yearly basis. You can vary this income at any time, meaning that one year you could take nothing at all and the next the maximum.

Every three years this maximum level has to be reviewed and can increase or decrease depending on a combination of the fund value, your age and the GAD rate at that time. It is also possible to request annual reviews at the instigation of the member.

However, for those who can show they meet the minimum income requirement of £12,000 per annum, HMRC allow you to take as much income as you want without any limits or reviews. This type of drawdown is referred to as Flexible Drawdown.

Income paid out under Drawdown is taxed as pension income in the year of payment.

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Category: How does Income Drawdown work?, Income Drawdown