Pension drawdown has been available since 1995 but historically it was only thought suitable for those with funds above a certain size for instance above £ 100,000. With the new freedoms drawdown has become more popular and almost any size of pension pot should be able to benefit from drawdown. However, some pension companies may have minimum funds sizes for their drawdown policies.
What is pension drawdown
This a special type of personal pension plan which you can transfer to after the age of 55 and after taking your 25% tax free cash you can take income payments (which are taxed at your marginal rate) direct from your pension pot.
In many ways, this is similar to taking an income direct from your bank or savings account (with some extra rules) and if you take more income than the interest or investment growth the value of your pension pot will reduce and at the extreme you could run the pot dry.
With pension drawdown you can take regular or ad hoc income payments directly from your pension pot. This means you keep control over your pension pot and have the flexibility to spend and invest your pension pot as you want.
It is important to remember, unlike an annuity, your income is not normally guaranteed and if you take too much income in the early years or if the fund does not increase in value as planned, you could end up with a lower income or even run out of money entirely.
Your pension pot can be invested in a number of ways ranging from cash, bonds, equities and even property (you cannot invest directly in residential property).
You can leave money to your family.
After your death, any money remaining in your pension pot can be left to your beneficiaries.
Advantages and disadvantages
More about DD
Drawdown may be the most flexible retirement option but it also the most risky.
It is important to remember that unlike an annuity, your income is not guaranteed and if you take too much income in the early years or if the fund does not increase in value as planned, you could end up with a lower income or even run out of money entirely.
Sustainable income means being able to maintain the level of income for the rest of your life and keeping up with inflation
Sequence of returns
Sequence of returns risk is the risk that investment returns are lower than expected or
negative in the early stages of drawdown resulting in capital being eroded
quicker than anticipated.
Mortality drag is the negative effect of missing out on mortality cross subsidy if an annuity is deferred from one year to another. It is expressed as the additional investment return needed year by year in order to maintain the annuity purchasing power assuming the underlying annuity rate remains constant.