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Alternatives to flexible drawdown

This article is part of
Guide to Flexible Drawdown

Flexible drawdown is a way of drawing income from a pension fund – the only requirement is the need for an MIR of at least £20,000 a year.

Alternative ways of turning a pension fund into a retirement income are capped drawdown, which is still subject to limits on the maximum income that can be drawn in a year, and annuity purchase, which buys a known level of income.

There are also products such as temporary annuities or variable annuities, which might contain guarantees or the chance to lock in investment growth.

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However, Mike Morrison, head of platform marketing of AJ Bell, warns these products can be complicated and advice will probably be needed.

In respect of money purchase savings, Adrian Walker, retirement planning manager of Skandia, says clients must use at least 75 per cent of those savings to provide retirement income, which can be provided through a variety of options.

Mr Walker states a lifetime annuity, which converts the capital value of their pension savings into a guaranteed income stream over their remaining lifetime, can include provision for the annuity to provide continuing income for their spouse or financial dependant when the client dies. He adds they can also have capital protection applied to the basis of the annuity purchased.

Mr Walker also points to capped drawdown, which produces income that has a maximum annual income cap applied which is determined by age related income factors dependant on underlying gilt yields.

“This is reviewed as a minimum every three years up to the client’s 75th birthday and yearly from the scheme income year beyond age 75, if offered by the provider.

“Clients can blend their retirement income strategies with a combination of income withdrawal and lifetime annuity to mitigate part of the underlying investment risk.

“Some clients may wish to start drawing their income using either of the above approaches until their secure pension income of £20,000 a year has become fully payable.

“This may happen when they reach the age that their state pension kicks in. They can then convert the remainder of their pension savings that are untouched, or in capped drawdown, into flexible drawdown to remove the income restrictions that the other options provide.”