What is income drawdown?

Category: Retirement
Author: Tim Leonard
Updated: 14/06/2018

When you retire, you don't have to go down the route of purchasing an annuity.

An alternative is to leave your pension invested, and take a portion of the pension pot each year as an income, hence the phrase 'income drawdown'. The pensions changes that came into effect in April 2015 make it easier than ever to take an income from your fund.

Income drawdown – which you may also hear referred to as an unsecured pension – has the advantage of possibly leaving your family some legacy when you die as your pension pot will pass on to your family according to your wishes. Depending on the age you are when you die, the unused pension pot you pass on may be tax-free. If you are under 75 when you die, your dependents will receive a tax-free payment. If you are 75 or older, the payment is taxable at the beneficiary's income tax rate.

Risks of opting for income drawdown:

• Income drawdown is not guaranteed for life: you only have an income for as long as you have a pension pot, so if you empty your pot, you will face later retirement with a much reduced income.
• In addition, because your pension remains invested, the value of it could go down, at a time when you're probably not in a position to replace this loss with new money.

A pension is a type of investment and investments are risk-based products. This means that the value of your initial investment and any income generated can fall as well as rise. If you are in any doubt we highly recommended that you seek independent financial advice when deciding which retirement options are the best for you.

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