The value of investments and the income they produce can fall as well as rise.
60%+ of people who come to me with enquires about pensions are between 45 and 65 years of age.
They are often still working and plan to keep on working until they reach the age of 65 for one reason or another. Because they still have an income they often aren’t keen to crystallise their personal pensions completely as it will be taxed at their tax highest tax band as earned income, nor are people inclined to buy an annuity as rates are poor.
There are options available to people in this situation. It may be that you can take income drawdown (flexible or capped -> phased or un-phased) from your UK registered personal pension or SIPP, although you typically must have a pot of £50k or more to do this.
In essence basic income drawdown enables you to ‘draw’ a slice of your pension each pension year. If you think of your pension as a pie, you can take one slice per year whilst keeping the rest still invested in the markets. You will need to opt for a 25% tax free lump sum (PCLS) at the onset of drawdown in non-phased drawdown should you wish to. Income is taxed through PAYE.
Phased income drawdown is where the ‘slices’ are treated as actual segments of the pension in their own right or lots of mini pensions within one big one. If you opt for ‘phased’ drawdown you can take a PCLS each time you crystallise a ‘slice’.
Annual income is based on 0-120% of GAD (Government Actuarial department) rates, and reviewed every 3 years pre-75 yoa and annually thereafter.
A summary of the pros and cons to a drawdown pension arrangement are as follows:
|
Pros |
Cons |
| Potential upside growth from keeping uncrystallised funds invested in markets. | Level of risk is higher because funds remain invested and may be subject to poor investment performance – it is recommended therefore to use a defensive volatility reducing fund if entering into this arrangement. |
| No need to decide on an annuity at onset, but annuities can be bought with drawdown income if required. | It is a complex arrangement and needs a Financial Adviser to manage. Regular reviews are required. |
| Income flexibility is total and can be reduced to £0 at any point. | The costs of drawdown are higher than taking a secured pension. |
| Higher lump sum death benefits if the member at death was under the age of 75, then the whole of the uncrystallised fund can be returned as a tax free lum sum, preferably into a pension trust! | The member must not have made any contributions to a money purchase arrangement held under a registered pension scheme in the tax year they enter flexible drawdown nor should anyone else have made contributions on their behalf. |
| It is possible to continue to contribute to a personal or occupational pension whilst in capped drawdown. | Under flexible drawdown it is not possible to continue building benefits up under a Defined Benefit or Cash Balance Arrangement. |
A drawdown pension can be taken from age 55 and is typically used supplement your income, provide increased flexibility and possible enhanced death benefits for beneficiaries.
In general, Stakeholder pensions don’t offer drawdown and defined contribution pensions vary from scheme to scheme.