People who choose income drawdown will have a higher degree of control and flexibility over their underlying pension fund, income, timing of annuity purchase and death benefits, explains Billy Mackay, marketing director of AJ Bell.
And because the funds remains invested, there is the potential for them to continue growing in a tax efficient manner throughout retirement. Part of the fund can remain uncrystallised, with better death benefits and the option of deferring the tax free lump sum.
A phased crystallisation offers additional flexibility and tax efficiency, says Alan Mellor, managing director at Phillip Bates & Co, could allow a pensioner to achieve a target level of income with a mixture of income and tax free cash.
“Uncrystallised funds can be taken as a tax free lump sum death benefit, subject to lifetime allowance limits, and crystallised funds can be taken as a lump sum with a 55 per cent tax charge or as an income, subject to income tax.”
Andrew Pennie, marketing director of Intelligent Pensions, says that these aspects of drawdown provide the opportunity to use the pension for estate planning and preservation of capital. He also notes that drawdown provides the opportunity for improvements in future annuity rates.
But he acknowledges, as all advisers do, that drawdown has drawbacks, including the possibility that investment values may fall and that high withdrawals may not be sustainable, particularly in times of falling stock markets.
“[There is] no guarantee income will be higher than annuity – now or in future,” is Mr Pennie’s stark reminder.
“Drawdown by its very nature becomes progressively less suitable – for the majority – as a client gets older. A serious risk of drawdown is staying in it for too long... due to the opportunity cost of increasing mortality subsidy from annuities as a client gets older,” he adds.
Income withdrawal erodes the capital value of the fund, especially if investment returns are poor and a high level of income is taken, which could result in a lower income if an annuity is eventually purchased.
Mr Mellor adds that an important downside for clients is that for drawdown arrangements to work effectively it requires periodic reviews which means more charges, which then in turn increases the required investment hurdle rate.
