Drawdown is a flexible pension plan, which allows you to vary your income and tax-free cash to suit your needs. This means that you can turn your income on and off as required. Your money stays invested, so you will have the risks associated with investment choices, although these can be adapted to suit your circumstances.
This is very much like the pe
nsion plan you may already have at present. The difference is that you can draw down some or all of your 25% tax free cash, and either take an income from the rest or leave it invested. You can invest your pension plan based on your attitude to investment risk, but have the flexibility to take an income or any remaining part of your lump sum as and when you need it.
Advantages
- It is very flexible. You can turn income on and off as and when required.
- Death benefit – Should you die then the pension will pass to your
spouse and they could continue to draw it as you were doing, or they could take it as a lump sum minus 55% tax. - Investment – You can still invest in the markets if you would like to do so; this can be based on your attitude to risk.
- You can structure your income to be very tax efficient; for example you may not need all your tax free income in one lump sum, and could therefore take it on a flexible basis, meaning that a proportion of the income in year one could be tax free, thereby reducing your tax liability.
- Increased income – Should your investments do well then you could find that your income rises.
Disadvantages
- Invested – When you reach retirement you may not want to expose yourself to any risk, and this could mean that your money runs out.
- Decrease of income – As your money is invested, your income could decrease should the investment decrease in value.
- Cost – Running costs are proportionately higher for smaller funds, therefore this type of plan may not be suitable for funds of less than £40,000.
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