This is a scheme whereby instead of the money acrued in a pension scheme being used to purchase an annuity which will then ensure a regular income until the recipients death, the money is left invested in the pension fund and the recipient draws down money from the fund. Two main points to consider with regard to this type of arrangement are:-
- Should the recipient of the pension die soon after starting an income drawdown scheme, the money still remains invested in the pension fund and so can be passed on to others (after a fairly substantial tax has been paid). Conversely, if the recipient lives for many years after starting the scheme then there is a danger that his pension investment could run out. For this reason, these schemes are generally only recommended for people with large pension pots.
- Since the money remains invested in the pension fund it will benefit from any increase due to the performance of the investment itself. Conversely, should the fund begin to perform poorly then the pension fund will be reduced accordingly.
Income drawdown and its suitability can be fairly complex and there are many rules governing how much can be drawn down so it is recommended that you always seek advice before considering such an arrangement.
A pension is a long term investment. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.
The value of your investment and income from it is not guaranteed it can go down as well as up due to fluctuations in investment markets, and you may not get back the full amount invested.
Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.