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Date Added: May 21, 2014 07:36:09 PM
Author: Lowell Weston
Category: Health: Education

Away from final salary schemes, most pensioners take an annuity for their retirement income but there is another option. We explain about keeping your pension invested through drawdown, the catches and whether you can do it. Pension pot: What is the best way to maximise yours? The financial decisions you make at retirement will impact the rest of your life, so it's worth considering all your options before taking any major steps. The conventional route for most pensioners is to take out an annuity - but there can be downsides to being stuck with one source of income that is paying out a fixed amount. Annuity rates have been historically low in recent years, and although they are starting to pick up many people still feel they need to make more out of their nest egg to be able to afford a higher standard of living at retirement. Others with a larger pension may be willing to take on a little extra risk to generate better potential returns and flexibility. One alternative to an annuity is to transfer your pot, or part of your pot, into a drawdown scheme. The schemes, sometimes known as income withdrawal, allow you to leave the majority of your cash invested, while taking an income from its growth. However, although drawdown is flexible, this can make it more complex for people to understand and there are strict rules about who qualifies for the most flexible element of it. More... Could equity release be a good option for you? Find out using our free guide Kick back and enjoy your retirement: What you need to know about annuities and how to make the most of your pension pot Mortgage v pension: Should people in their 20s be saving for a house or for retirement? How does income drawdown work? Once you have transferred your pension pot to an income drawdown scheme, either with your existing provider if they offer it, or to another provider, you are entitled to take out a tax-free cash lump sum, usually a maximum of 25 per cent of the pot. The remaining pot is then invested into investment funds in order to provide growth and income. Pensioners can use this investment pot for their income - taking differing amounts dependent upon their needs, as long as they meet the strict rules imposed on them. Roger Marsden, head of Retirement Propositions at Aviva explains: 'Drawdown allows customers to take an income from their pension fund while it remains invested, and can therefore benefit from flexibility and any potential investment growth, free from UK income and capital gains tax.' QUICK GUIDE: CAPPED VS FLEXIBLE DRAWDOWNDrawdown keeps your pension invested so that you can take an income from it and a lump sum without needing to buy an annuity. Our full guide to capped and flexible drawdown is below, but this is a quick snapshot from the Money Advice Service. Capped drawdown An upper limit on the income you can take a requirement to review the upper limit every three years no minimum level of income you must take - so your fund can remain invested for as long as you like without drawing any income at all Flexible drawdown Under flexible drawdown, there are no limits on the income you can draw, but you must be able to show you are already receiving other pension income of at least 20,000 a year. This minimum income level includes state pension benefits, salary-related pensions, lifetime annuities and scheme pensions. This limit applies to 2013 to 14 and may change in the future. Why would someone choose drawdown? There are a number of reasons why someone might choose to go down the drawdown route. For a start, it is much more flexible than a traditional annuity. It allows you to keep your options open and provides you with more choice and control. If you wish, you can release your tax-free lump sum without taking any income or locking into an annuity. You can also alter your payments to reduce tax. As Marsden explains: 'Drawdown gives customers flexibility in retirement; they can choose how much or how little income to take (within strict Government limits) and this can be varied throughout the life of the policy, unlike an annuity where the income is dictated by the choices made at outset. The death benefits are also a draw - with an annuity, you have to pay a premium to allow your pension pot to pass to a spouse or dependents. Marsden adds: 'The death benefits can also be more favourable than those of an annuity, in that the customers beneficiaries can use the remaining fund to generate an income or have it returned to them, less any tax.