July 24, 2014

Income Drawdown

An Income Drawdown allows you to take an income from your pension pot, while at the same time leaving it invested in the stock market or in funds. This strongly contrasts to annuity as the latter requires you to hand over your full pension pot to an insurance company who will then guarantee an annual income for as long as you may live.

There are a number of advantages of Income Drawdown, the first is that you retain total control of your pension pot. Therefore, if you die, your dependants will be able to benefit from the pot. This contrasts to an annuity in which an insurance company will keep your pension pot unless a guarantee has been negotiated. Likewise, an Income Drawdown can be incredibly flexible as you can turn on or off your income at any time, therefore it makes sense for those wishing to ease into retirement.

However, the key thing to remember is that an Annuity provides you with a guaranteed income for life, although the sacrifice is a complete loss of immediate capital. A further ‘disadvantage’ of Income Drawdown compared to an Annuity is that your pension pot may be susceptible to volatility in the stock markets which could decrease the value of your pension unexpectedly.