Pension Drawdown

There are two different types of drawdown contract you can own – capped drawdown and flexi-access drawdown.

Capped drawdown allows a policyholder to withdraw income, within limits, from their pension fund without purchasing a lifetime annuity. This was the traditional method of drawdown but has been superceded by flexi-access drawdown.

No new capped drawdown arrangements can now be created, however it is still possible to transfer from one capped arrangement to another and, in some cases, for additional pension funds to be added to the capped drawdown plan. It is now more commonplace for capped drawdown arrangements to be converted to flexi-access drawdown.

The maximum amount of income that can be drawn from capped drawdown is 150% of a comparable lifetime annuity based on tables published by the Government Actuary’s Department. It is not however necessary for any income to be taken. Any amount of income from zero income through to the 150% maximum can be selected. The plan and maximum income will be reviewed every three years up to the anniversary of entering drawdown until the 75th birthday and annually thereafter.

Flexi-access drawdown is very similar to capped drawdown but does not have as many limits with regards the income which can be withdrawn from a pension; it is flexible with regards the money which can be taken out and therefore not ‘capped’ at a certain limit.

For flexi-access drawdown, the policyholder can choose how much income they want to withdraw without reference to any rates or limits other than the size of their pension. If they or their spouse is relatively young, a secured pension (lifetime annuity or scheme pension) would be less attractive due to the lower mortality factor. There is also a longer timescale to take advantage of the potential investment rewards and risks of a drawdown pension. However, the levels of income provided may not be sustainable, i.e. the pension may run out.

By retaining money in a pension, even if in a drawdown arrangement, a policyholder has the opportunity to transfer it to a different pension provider at a later date should they wish to. It also allows beneficiaries to continue taking withdrawals once the policyholder has passed away.

Irrespective of the drawdown contract, taking withdrawals may erode the capital value of the fund, especially if investment returns are poor and a high level of income is being taken. This could result in a lower income if/when an annuity is eventually purchased, or no fund at all, if fully withdrawn. Most drawdown contracts allow for the first 25% of a withdrawal to be taken tax-free, and everything thereafter is fully taxable at source.