Income drawdown, also known as Unsecured Pension (USP), is a popular alternative to purchasing a lifetime or conventional annuity. Under income drawdown, your pension fund remains invested under your control and you take an income direct from your fund.
The government sets limits on the amount of income you can take each year. If you are under age 75 you do not have to take any income and the maximum income you can take is approximately 120% of a single life annuity (calculated in accordance with rates provided by the Government Actuary's Department). The more income you take from your pension fund, the smaller your remaining pension fund will be. You will therefore be relying on the investment returns being sufficient, at least in part, to cover your income requirements. If the investments fall, this will impact on the income you will receive over the medium to long term.
The maximum amount of income you can take each year is reviewed every five years, based on your age, gender and remaining pension fund at the time.
Once you reach age 77 (provided you were under age 75 on 22nd June 2010), you must secure your future retirement income either by the purchase of an annuity, or continuing into Alternatively Secured Income (ASP).
ASP works in a similar way to USP, but with different limits on the amount of income you can take from your pension fund. Under ASP you must take a minimum income of at least 55% of a single life annuity, calculated in accordance with the Government Actuary's Department's instructions. The maximum income you can take is 90% of this value. Once in ASP, these limits are reviewed on a yearly basis.
The government has indicated that it is planning to change the legislation requiring you to purchase an annuity upon attaining age 75 with effect from April 2011, however the details of the proposals have yet to be published.
One of the main advantages of income drawdown is that it gives you greater flexibility on the death benefits that can be paid. If you die before age 77 (provided you were under age 75 on 22nd June 2010) then your remaining pension fund can be used to provide a dependant's pension (either via an annuity or continuing in income drawdown) or be paid as a lump sum (which will be subject to a 35% tax charge). After age 77 the remaining fund must be used to provide a dependant's pension, or be paid, tax free, to a charity.
One of the main risks with Income Drawdown is that of mortality drag. If you purchase a conventional annuity you are guaranteed a fixed income for life, regardless of how long you live. This is because the insurance company, when setting its annuity rates, know that some of their clients will not live as long as anticipated and some will live longer. Under USP however, you do not benefit from this cross subsidy, so you will need to ensure that your investments grow sufficiently to compensate for this.
Because of the complexity and risks of drawdown, Rockingham Retirement recommends that you seek professional advice if you wish to consider this option at retirement. Please note that Rockingham Retirement is not authorised to provide advice. Should you require advice we may be able to arrange this for you.
Read More About the Benefits and Risk of Income Drawdown
