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  Disadvantages   Drawdown suitability

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  Pension drawdown rates

The following capped drawdown tables assumes a pension fund of £100,000 net of the £33,333 taken as a tax free lump sum from an original fund of £133,333. The highest annuity rates are on a standard single life, level with no guarantee basis and the income drawdown plan is based on a 150% withdrawal producing an increase/decrease in annual income over annuities.

The table shows the increase or decrease in annual income from an income drawdown plan when compared to the highest standard pension annuity.
   Pension drawdown rates - Unisex income

Fund size: £100,000 (after taking £33,333 tax free cash)

FTSE 15-year gilt yield: 3.00% (14 March 2014)

Last updated: 4 April 2014

Unisex Annuity vs Capped Drawdown
Age Single
Life Annuity
Drawdown More/Less
The annual rates shown above are based on a purchase price of £100,000 and should be used as a guide only. Pension drawdown assumes a maximum 150% withdrawal. Pension drawdown is a higher risk pension than annuities and not suitable for everyone. For a pension drawdown rate specific to your circumstances you should complete the drawdown quote.

As the spouse will receive the drawdown fund on death, the basis for the comparative annuity shows the spouse receiving the same benefits as the annuitant. For the above example the annuity is a single life, level, no guaranteed period, monthly advance annuity where both the male annuitant and female dependant are the same age.

As you can see from the table the figure of pension drawdown at ages 55 is 7,200, whereas at age 75, this has risen to 12,450. You may find the details shown within this table very helpful but they are based on a purchase price of 100,000 and therefore should only be used as a guide. It is likely that your own situation will be different therefore please do not assume these figures will apply to you too. As with any retirement plan there are advantages and disadvantages, and for this reason we have detailed a comprehensive list of advantages and disadvantages below which we hope will be of assistance.

The following are a number of advantages of pension drawdown that highlight the benefits of deferring taking a pension annuity until later:

An individual will be able to take a tax free cash lump sum immediately from their income drawdown plan to spend or invest as they wish. This option is not available through the phased retirement option but is available through annuities and open market option.
The level of income which may be withdrawn can be varied from a minimum of 0% to a maximum income of 150% based on a comparable annuity using the GAD tables up to the age of 85.
Subject to the above limits, the individual will be able to plan in advance the level of income that they wish to take each year from income drawdown, so that they can take into account any other sources of income which may be available to them.
The pension fund value (less any income withdrawn and associated charges) will continue to be invested until the individual decides to purchase an annuity. Depending upon investment returns, which can fall as well as rise and are not guaranteed, this may provide the opportunity to achieve sufficient growth to improve the ultimate benefits when the individual decides the time is right to purchase annuities.
The individual can structure their income to mitigate the liability to personal Income Tax. By reducing their income in some years, they may be able to avoid higher rate tax liability.
Potential death benefits may be greater than under the conventional annuities route, although a 55% tax charge will apply to any lump sum death benefits payable under an income drawdown plan.
On the death of the member the remaining vested pension fund can be returned to the individual's beneficiaries and remain in pension drawdown, free from Inheritance Tax and the additional 55% tax charge.
The individual may be able to use a pension fund withdrawal as part of their Inheritance Tax planning by using varying levels of income, within prescribed limits, and using all or part of the income to make gifts to take advantage of annual exemptions.
If the individual thinks the rates will improve they can delay purchasing annuities during their lifetime

Before making a decision regarding pension drawdown learn more about pension annuities, compare annuity rates, and secure a personalised annuity quote offering guaranteed rates.

The following are a number of disadvantages of pension drawdown that highlight the benefits for taking a pension annuity earlier:

There is no guarantee that the individuals income will be as high as that offered under the pension annuity (or compulsory purchase annuity).
Due to the effect of mortality drag the value of the pension fund may not achieve the required level of growth to maintain income levels at the same level to those achieved through the purchase of a pension annuity purchased at outset.
High withdrawals may erode the value of the pension fund, if investment returns are not sufficient to make up the balance this may reduce the amount of any potential pension annuity.
There is no guarantee that annuity rates will improve in the future. They could be lower when the individual decides to purchase their pension annuity than the current rates. The eventual pension may be lower than if the individual had bought a pension annuity at outset.
The value of the pension fund may go down as well as up and poor investment performance could result in the individual not having a sufficient fund available to purchase annuities equivalent to the amount they would have received at outset.
Death benefits payable as a lump sum that are not paid to the individual's spouse may be liable to Inheritance Tax in addition to the the 55% tax charge.
Charges within an income drawdown plan are higher than conventional pension annuities due to the requirement for regular reviews and investment advice to ensure the pension fund does not run out of money.

Drawdown suitability
The following are a number of reasons why an individual would consider income drawdown rather than to purchase a pension annuity:

Income drawdown could be attractive if an individual wishes to access the tax free lump sum but does not require a pension income, possibly because they continue to receive an income from employment.
If an individual is willing to accept a higher risk from pension drawdown over a longer period of time to benefit from continued investment growth, possibly because they have other significant assets and investments.
If an individual has alternative secure income such as a final salary pension and can afford to experience fluctuations in the income level from pension drawdown.
If an individual's existing pension scheme requires a spouses pension as part of the retirement benefit but the member is single, pension drawdown could be one option to consider.
If an individual is in poor health, income drawdown can be considered in addition to impaired health annuities to provide a pension income.
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  55 £4,899  
  60 £5,426  
  65 £6,080  
  70 £6,911  
  55 £4,630  
  60 £5,081  
  65 £5,610  
  70 £6,265  
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