Background

• The United Kingdom tax laws mean that in return for the tax advantages given to people who put money into a retirement savings plan, they are required to eventually use the money in the plan to buy an annuity. This is a financial product bought for a fixed price that then pays a fixed income to the person until death. In normal circumstances, a person must use any money left in a retirement savings plan to buy an annuity by the age of 75.
  
  

Concept

• Income drawdown is an option for people who wish to delay buying an annuity upon retirement but still wish to get some income. Income drawdown rules mean a person can withdraw some cash from the plan without affecting the tax advantages, subject to two limits. The first is that the total withdrawals are limited to 25 percent of the total plan value. The second is that there is a maximum amount that can be withdrawn in the first five years after reaching retirement age; this amount is determined by the amount of money in the fund and prevailing tax rules.
  
  

Pros

• Income drawdown allows people to delay buying an annuity if they can afford to do so, which is useful if annuity rates are high, meaning the pension received will be relatively low. Income drawdown also allows people to reinvest the money, potentially getting a better return than with a retirement savings plan.
  
  

Cons

• Using income drawdown and waiting to buy an annuity can backfire if annuity rates go on to become less favorable. This can lead to a person getting to the age of 75 and being forced to take poor rates.
  
  Income drawdown is not usually suitable for people with relatively small amounts in a retirement savings plan as the maximum amount that can be withdrawn may not be enough to live on until an annuity is bought.
  
  Using income drawdown means the amount of money available to buy an annuity will be lower. In turn, the pension provided by the annuity will be lower.