What is Meant by Pension Drawdown? By Sean Horton At Isnare.com Ezine Articles

Some pension schemes – notably self-invested personal pensions, executive pension plans and small self-administered pension schemes – allow a contributing member aged between 50 and 75 to leave their pension savings invested in the fund and to take out a regular income rather than buy an annuity. This is known as pension drawdown or pension income drawdown

The advantages

The main reasons for taking a pension drawdown are twofold: if annuity rates are low, then the fund-holder can delay buying an annuity, since the older you are when making that purchase the more attractive a rate of return will be offered; and, if the pension investments remaining in the fund are performing well and are expected to continue to so into the future, then the pension fund will have grown accordingly and will provide the resources for an enhanced annuity when the time comes to buy it.

The actual amount of the drawdown can be varied year on year, up to a maximum of 120% of a pension calculated with reference to tables produced by the Government Actuaries Department (tables which calculate the annuity that could be bought from the proceeds of the pension fund. These tables are revised every five years).

A further advantage is that a pension drawdown leaves a residual pension fund that can be passed on to surviving relatives in the event of your death – whereas the benefits of an annuity purchased with the fund cannot be passed on.

The residual fund can be topped up with transfers from other maturing personal and stakeholder pension plans, provided the full transfer value is made. However, it will not be possible to continue contributions to the residual fund.

Whatever the amounts of pension that have been drawn down, however, the residual pension must be converted into an annuity when the pension-holder reaches the age of 75.

The risks

As well as potential advantages in delaying the purchase of an annuity, there are also risks. The latter will depend on the performance of the residual pension fund (i.e. what is left after you have made your pension drawdown). If the remaining investments fail to perform well, then of course, the fund will contain significantly less with which to buy the eventual annuity. Indeed, if insufficient resources are left in the fund, or if that fund performs poorly, then the annuity eventually purchased could be a lot less than that which would have been possible at the outset.

It can readily be seen, therefore, that pension drawdown is something that should be considered only if there is a quite sizeable pension fund involved and it is possible to leave a significant proportion of that in the residual fund. Indeed, The Pensions Advisory Service currently advises that a pension fund should be worth at least £100,000 before pension drawdown can be considered "a viable option".

There is the further disadvantage, as already noted, that once a pension drawdown option has been exercised, it will no longer be possible to continue to make contributions to the residual fund.

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