Simply put, income drawdown, sometimes referred to as an unsecured pension, is an alternative to purchasing a lifetime annuity on retirement.
Income drawdown enables a retiree to draw an income whilst they still have money invested. Usually, one would have bought an annuity by then. This mechanism is most useful for people with larger pensions above £100,000 along with other investments or assetts.
At any time you can choose to buy a short-term or lifetime annuity.
This mechanism works well when your investments grow and pay the charges and give you an income. Remember that your investments could fall in value meaning less income in the future.
When you hit 75 it is necessary for you to buy an annuity or enter into an Alternatively Secured Pension (ASP) arrangement. ASP is a form of Pension Drawdown and works in similar ways but has more restrictions on income limits and death benefits.
What happens if you die?
If you should die before reaching the age of 75, and you are yet to buy an annuity, your pension funds can pass to your spouse and/or any dependants. They will then have some annuity options available to them.
In some cases occupational schemes allow income drawdown and others don’t. If you want to use the facility it may be possible to transfer your funds into a private pension which allows the use of the mechanism. It is imprtant that you take financial advice, especially when transferring from occupational schemes, in case there are defined benefits or other guarentees.
Pension Income drawdown is quite a complex system. It is therefore important to get sound advice. It is probably not a good idea if you do not have other income or assets, or do not have a large pension fund. It will also depend on the level of risk you are willing to endure.
A variable annuity or a flexible annuity could provide you with an alternative solution to income drawdown. Hybrid products can be good if you are unsure of taking the risk but don’t want to committ to a lifetime annuity.