Income drawdown or PFW (Pension Fund Withdrawal) is an important retirement option worth considering, particularly for individuals who have ideally a reasonably sized pension capital.
Income drawdown plans were introduced following changes to Pension law in 1995. The changes removed the previous requirement to purchase an annuity at retirement. An income drawdown plan allows an income to be taken directly from the pension fund itself.
Income drawdown enhances the contracts flexibility in that annuity purchase can be deferred until a time when it may be more suitable. Most of the major pension companies now offer income drawdown plans.
These plans allow up to 25% of the retirement fund to be taken as Tax Free Cash and no income needs to be taken unless required.
Income levels are determined by reference to annuity tables produced by the governments’ actuarial department. The maximum income allowable is 120% of the highest level of income determined by the annuity tables, the minimum income which can be taken is nil. These limits allow further flexibility and so perhaps enable full retirement from a working life to be gradually phased in. These plans are categorised as ‘unsecured’ pension plans, currently an annuity will need to be purchased, usually by the age of 77, however under the emergency budget (22nd June 2010) this requirement will be abolished from tax year 2011/2012. There is also a further option for individuals reaching the age of 77 years to consider – the purchase of an ‘Alternatively secured pension’ plan.
Income drawdown plans are relatively complex and are not suitable for everyone, but they can for some individuals offer a flexible approach to retirement. Careful consideration must be given to an individual’s personal circumstances, including the value of their existing pension/s. You should seek independent financial advice from us.