This is the most flexible option, but it also contains a higher level of risk as your pension fund remains invested. It is always very important therefore to ensure the pension fund is invested in line with your attitude to risk.
Income is not paid to you through the purchase of an annuity. Instead the pension fund remains invested and you ‘drawdown’ an income (like a series of mini withdrawals) from the fund whenever you need it.
The minimum income is nil, there is no maximum, and the income can be changed at any time.
The main benefit is the flexibility. A traditional annuity for example cannot be stopped once started so if you found that you could have lived on a lower pension or none at all, there is no going back. With a pension in drawdown, you would simply stop the income.
For those considering semi retirement Income Drawdown would enable you to take just what level of income you needed until full retirement was reached, when you could reassess your needs and change the income accordingly.
Income Flexibility from April 6th 2015
The biggest headline change is that restrictions relating to the level of income that can be taken, have now been removed. You are able to withdraw any level of income you want, at any time, and in effect you could empty the pot all in one go if that was your wish. This sounds attractive, and it is certainly very flexible, but there are obvious dangers…
Three things to be careful of…
1. Firstly, as now, any income taken is taxed at the client’s marginal rate for the tax year the income is taken, so care has to be taken not to pay more tax than is necessary.
In nearly all cases emergency tax codes will be used for the initial payments, until HMRC issue the pension provider with a relevant tax code. This may well cause problems of ‘over taxation’.
This can be rectified later but it can be a laborious process. Often it will be better to start to take a very small withdrawal (where any over taxation will be marginal) until the tax code is issued, but over payment of tax could still occur.
2. Do not lose sight of the overriding purpose of why the pension pot is there, which will almost always be to provide a lifetime of income. Once the pot has gone, so has the income, therefore careful planning has to be undertaken to ensure that the fund lasts the course, and the final years of retirement are not spent in comparative poverty.
3. When a pension pot is put into ‘flexi drawdown’ there could also be implications on the receipt of means tested benefits, and also on Long Term Care costs.