Income drawdown

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Income drawdown is a method withdrawing benefits from a UK Registered Pension Scheme.^[1] In theory, it is available under any money purchase pension scheme. However, it is, in practice, rarely offered by occupational pensions and is therefore generally only available to those who own, or transfer to, a personal pension.

There are a number of different types of draw-down structures:

• Capped income drawdown - these permit the policy holder to withdraw an annual income between nothing and a maximum based on the initial fund value, their age at the time, and the current rates set by the UK Government Actuary's Department. The maximum is revised every three years until the 75th birthday and thereafter at annual intervals. The individual can choose to buy an annuity at any time.
• Flexible income drawdown - these allowed anyone who could prove they had enough qualifying secure pension earnings, to have unlimited access to their other pension fund. For flexible drawdown declarations made between 6 April 2011 and 26 March 2014, this amount was £20,000. For flexible drawdown declarations made on or after 27 March 2014, the amount is £12,000.^[2]
• Flexi-access drawdown - is a form of income drawdown introduced in 2015, which removing a number of the restrictions for those wishing to access their pensions. The flexi-access drawdown permits unlimited withdrawals from the pension fund from the age of 55. All withdrawals are treated as taxable UK income.^[3]

Income drawdown commences when the individual designates funds for it. At that time, they are permitted to take a Pension Commencement Lump Sum (a tax free lump sum of up to one third of the amount designated for income, i.e., 25% of the total taken at that time) and a life annuity is not purchased with the remainder. The income drawdown fund is also known as a crystallised pension fund. It is possible to crystallise a pension in stages. Uncrystalised Funds Pension Lump Sums or UFPLS, is an additional flexible way to take pension benefits. Rather than move the whole fund into a drawdown arrangement, ad-hoc lump sums can be taken from the pension. Any withdrawals will allow 25% to be taken tax free with the remaining 75% of the fund treated as taxable income.