This is the main alternative to buying a guaranteed income for life from an insurance company. Your pension remains invested in the stock market, fixed income holdings or other assets and an income is then taken from those pension investments either regularly or as and when you need it.
The government used to impose caps on how much income you could take from a pension you left invested. But from 6th April 2015 those caps were abolished and there are now no limits on the income you can take apart from – obviously – how much is left in your pension altogether.
After you have taken your allowed tax-free cash (usually up to 25% of the value of your pension investments) you can choose to take as much or as little income from your remaining pension investments as you wish. It will be added to any other income you have in that tax year to determine your tax liability. If you die before you turn 75, any funds remaining in your pension will be paid out to your beneficiary, whether as a lump sum or an income and they won’t have to pay tax on it.
Advantages Of Drawing Down
- You are able to take all of your tax-free cash lump sum entitlement.
- You do not receive a set income but can vary it to suit your personal circumstances, or to supplement other sources of income.
- You are able to mitigate your liability to income tax in certain years.
- You have the potential to benefit from good investment performance in a tax-efficient environment and to exercise control over your own investment portfolio.
- There are flexible death benefits.
Disadvantages Of Drawing Down
- You may run out of money and have no pension left, especially if you take high income withdrawals.
- If you take large withdrawals these may affect your entitlement to any means tested benefits that you receive from the Department for Work & Pensions. Your State Pension is not means tested.
- Taking large withdrawals may erode the capital value of the fund, especially if investment returns are poor and you take a lot of income.
- You are vulnerable to changes in the value of investments which can go down as well as up. This means the value of your pension investments could fall and affect your future income levels.
- Withdrawing too much income in early years may have an adverse effect on preserving your pension purchasing power or preserving the capital value of your fund.
- Increased flexibility can bring increased costs and the need to review arrangements regularly.
- There is no guarantee that your future income will be as high as that offered by buying a guaranteed income for life today.
- To review the disadvantages of transferring from a secure benefits scheme click here.