Income drawdown, income withdrawal, drawdown, pension fund withdrawal are all different names for the same product. This is a method of taking pension benefits without buying an annuity. Slightly different rules apply depending on your age. If you're under 75 then an income drawdown contract is a form of unsecured pension, and if you're age 75 or older then it is a type of alternatively secured pension.

Income drawdown - the basics

The basics of an income drawdown contract are relatively simple. Just like an annuity you can take the tax-free cash from the pension, but rather than buying a fixed income with the remaining funds, you just withdraw money each year from the drawdown contract. If the pension fund grows by more than you're withdrawing, then the fund will increase in value.

The amount you can withdraw from an income drawdown contract can be varied between a lower and upper limit. The maximum is based on your age, and rates set by the Government Actuary Department. These rates are known as GAD rates, and these also depend on Gilt yields.

The advantages of an income drawdown

• The tax-free lump sum can be taken

• Income drawdown allows the income to be varied each year to suit your circumstances

• Income drawdown permits you to just take the lump sum and no income if you want, (if you're under age 75)

• Income drawdown avoids buying an annuity completely

• Your don’t have to decide on whether to include spouse’s benefits or other such options with an income drawdown contract

• The fund stays in a favourable tax environment within the drawdown contract

• The fund remains invested so it could grow further

The death benefits of an income drawdown contract are for many people more attractive than through an annuity, since the fund is not lost on death. Instead the fund can be passed on. How it is passed on depends on whether you're under 75, and in Unsecured Pension or older than 75 and in Alternatively Secured Pension.

There are of course disadvantages to an income drawdown plan:

• Annuity rates could go down, if you later decide you want to buy an annuity with your remaining income drawdown funds

• The income drawdown contract could fall in value

• The income is not guaranteed and could go down

• Income drawdown requires ongoing monitoring of the plan

• Charges are higher for income drawdown than annuity purchase

There is also a loss of the what is known as mortality cross subsidy which is gained through annuity purchase. This cross subsidy is the additional income you effectively receive when you buy an annuity, since the funds of people who die earlier than anticipated are in part used to provide income to those who live longer.

The main disadvantage is that the value of the fund may be  eroded, especially if investment returns are poor and a high level of income is taken; this could result in a lower income in the future.

If you have a question about income drawdown or want to discuss drawdown in more detail and how it can benefit you then contact us online or phone 0800 011 2713 , or click on the links below to find out more.

More on income drawdown - more detailed information on income drawdown

Unsecured Pension - if you want to know more about the options for those under 75

Alternatively Secured Pension - if you want to know more about the contract for those over age 75

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