Is it right for you?

As an alternative to purchasing an annuity, income drawdown has been a controversial choice, and it is clearly appropriate for only a limited class of people. Yet we continue to come across new clients with income drawdown products where

the risks were not properly explained
there is no other secure source of income
there is little or no evidence of any ongoing service from the original adviser

None of us can afford to forget that if your income drawdown plan doesn’t work out, or for that matter any retirement product that involves investment risk, you don’t get the chance to go around the block again to rebuild your pension fund.

In our view you should not be considering income drawdown unless the following criteria apply:

You have a fund of £250,000, or greater
You must take a moderately adventurous view of investment risk and reward, being comfortable with Stock market risk
You have substantial assets outside your pension funds
You have other secure sources of income, such that during periods of poor investment returns there is other income to fall back on

It’s not a hard and fast rule, but generally income withdrawal clients like to take the tax-free lump sum from their retirement fund, while phased retirement clients have no immediate need for it.

The flexibility of income drawdown comes at a price and you must understand the risks:

When you eventually buy an annuity (currently compulsory at age 75) your income could fall if annuity rates are lower than when you retired
Falling annuity rates could cause your income to fall at the five year review, as these will cause the GAD limits to fall
The performance of your chosen investments must be good enough to sustain the income payments needed now and in the future
If the performance is not good enough, an income withdrawals policy’s capital value will be eroded, such that, the amount of income you can withdraw may have to be reduced
and, the annuity eventually purchased could be substantially below what you expected or require

In recent years income drawdown investors have suffered the double whammy of investment values and GAD limits falling.

Extra care is required if you otherwise might have been entitled to an enhanced or impaired annuity. Your income drawdown illustration has a critical yield based on the growth required to ensure your fund is big enough to buy a conventional annuity. But what this illustration doesn’t take into account is that a large proportion of people are entitled to an enhanced or impaired annuity, and therefore in practice the required growth rate on the income drawdown plan, the so called critical yield, may be somewhat higher.

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