Income drawdown is a type of retirement income product that lets you draw an income from your pension pot while leaving the remainder invested. This means you can continue to benefit from growth in the fund. By using income drawdown, you avoid or can delay having to turn your pension pot into an annuity.

There are two kinds of income withdrawal: capped drawdown and flexible drawdown. In both cases, any income you take from your pension is taxed in the same way as other retirement income.

Capped drawdown


Allows you to take an income for life, or to choose not to take an income

  • The maximum income will be, broadly, 150% of the amount payable from a comparable annuity. The actual amount is based on rates set by the government.
  • A tax charge of 55% is currently payable on any lump sum on death. However, if your partner or dependants choose not to take a lump sum, but carry on withdrawing income or choose to buy an annuity, the 55% tax charge will not apply.

From April 2015, the restrictions on drawdown will no longer apply and you can take as much as you want from your pension fund, when you want. However, if you are currently in capped drawdown, and would like to continue making contributions to your pension fund, it can make sense to maintain the existing limits beyond April 2015. This is a complex issue and if you think this may apply to you, you are advised to seek financial advice.

Increasing your income drawdown amount may also affect how much Income Tax you pay. So unless you need the extra income, you may want to limit the increase to keep you in your current tax band. This will become especially relevant from April 2015 when there will be no limit on how much you can take out.

Flexible drawdown


Allows you to take as much as you like from your fund, but you have to demonstrate that you can meet a Minimum Income Requirement (MIR). Currently, the MIR is £12,000, but this requirement will no longer apply from April 2015 (see note below).
Not all income you may receive will qualify as MIR, but the following examples will qualify:

  • State pension
  • Final salary pensions
  • Conventional annuities

It's important to bear in mind that it's not enough to demonstrate that you could meet the MIR, you must actually be receiving this income.

Any withdrawals you make will be subject to income tax and the rules on lump sum payments on death are the same as for capped drawdown.

IMPORTANT: There are significant changes planned to take effect from April 2015 which will introduce greater flexibility and choice.  View What's Changed for more information.

 

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