Income drawdown

Income drawdown. When you retire, if you're not a member of a defined benefit pension scheme, you will be faced with the decision of how to create an income in retirement out of your pension fund. You don't have to purchase an annuity until you reach age 75 and you may prefer to put off doing so in the hope, perhaps, of either achieving a higher annuity rate when you are older or growing your savings by leaving them invested or both.

Income drawdown is one option for putting off purchasing an annuity. You may take an income direct from your pension fund. However, if you want to take part of your pension fund as a tax-free lump sum you do this before starting to take income from the fund. Any income you take out of your remaining pension fund is taxable.

The Inland Revenue limits the maximum income that people can take out of their pension fund through income drawdown to broadly the same as a level annuity for a single person of your age and sex. The rules also set a minimum income you may take, which is 35% of the maximum.

Income drawdown can be risky (since your funds remain invested) and may be expensive to operate. It is not generally recommended for those with pension funds worth less than £100,000. You will need to take expert independent financial advice and your pension fund under investment would need to be reviewed regularly.

Last Updated: August 2007 © Moneyextra.com

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