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 100% joint life, level with no guarantee basis and the income drawdown plan is based on a 100% withdrawal producing an increase/decrease in annual income over annuities.
The FTSE 15-year gilt yield of 2.25% has been used from the GAD tables and 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: 2.35%(14 December 2012)
Last updated: 14 December 2012
Unisex Annuity vs Capped Drawdown
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 100% 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 100% joint life, level, no guaranteed period, monthly advance annuity where both the male annuitant and female dependant are the same age.
The following are a number of advantages of pension drawdown
that highlight the benefits of deferring taking a pension annuity
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
The level of income which
may be withdrawn can be varied from a minimum of 0% to a maximum income of 100% based on a comparable annuity using the GAD tables up to the age of 85.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
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(less any income withdrawn and associated charges) will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
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
The following are a number of disadvantages of pension drawdown
that highlight the benefits for taking a pension
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
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.
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.