Income Withdrawal

When you come to retire, or decide to continue working whilst beginning to draw a pension, you will have a range of options for securing an annual income from your pension fund. If you are a member of an occupational defined benefit pension scheme (see Defined Benefit Schemes), your scheme advisor will be able to inform you of the process you need to follow to begin receiving your pension; for more details see Claiming your non-state pension. If you are a member of a defined contribution scheme, also called a money purchase scheme, (see Defined Contribution Schemes and Personal Pensions) you will have two options for converting your pension fund into an annual pension. The first of these options, purchasing an annual pension from an insurance company, is detailed in Annuities.

The second option is to draw an annual income from your pension fund, without purchasing an annuity. This option, known as income withdrawal or unsecured income, enables you to receive an annuity without having to purchase an annuity and be bound to one insurance company for the duration of your retirement. If annuity rates are low, the economic climate is uncertain or you are choosing to retire at a young age, purchasing an annuity may seem an expensive option; if you are quoted a small annuity for a large pension fund, you may prefer to wait and purchase what will hopefully be a larger annuity when rates are higher, the economy is stable and / or you are older, see Deferring your annuity purchase. You could purchase a short-term annuity and review the situation in up to five years' time; see Types of annuity. Alternatively, you could opt for income withdrawal, and wait for an opportune time to secure a better annuity.

Income withdrawal requires you to invest your pension fund; your fund will be invested in products deemed suitable by the fund managers, such as property, government bonds or the stock market. Although your fund should be managed to ensure there is a minimal risk of you losing your money, this can happen and you ought to remember that any kind of investment is a risk. However, in order for your fund to grow at a rate that counteracts you withdrawing money for a pension, it must be invested in products that are likely to provide good returns: these are often inescapably riskier than products which offer you security but low returns. When you choose income withdrawal, you will be advised on how the process works and introduced to an advisor who will monitor your fund and advise you on the decisions you need to make, such as how much to withdraw each year.

Income withdrawal appeals to many people because it offers you a higher annuity than you would receive if you were to purchase a traditional annuity. Until age seventy-five, income withdrawal allows you to take out up to 120% of the value of the standard annuity you would otherwise have been able to purchase. The government publishes an annual list of the standard annuities for different genders, ages, and pension funds. You are essentially entitled to more money each year if you choose income withdrawal. However, failing to purchase an annuity means that unless your investment returns can cover the cost of your withdrawals and fund management charges, your pension fund will reduce in value; the amount of retirement income you will be able to receive in the future is reduced. After the age of seventy-five, you will be allowed to withdraw a maximum of 70% of the standard annuity you would otherwise have been able to purchase. There is never a minimum limit on the amount you can withdraw; if you choose to invest your pension fund you do not have to withdraw any money at all. The maximum limit for your withdrawals will be reviewed every five years by your advisor. You can however opt to review your situation more regularly, if you are anxious to ensure that income withdrawal is still your best option.

Income withdrawal has several advantages and disadvantages. As with any long-term decision regarding your finances, especially in retirement, it is best to consult an independent financial advisor who can assess the best option to suit your personal circumstances. You may have to pay a fee for professional advice, but if your future financial security relies upon making the right decision, it will usually prove a sound investment. The important points to consider when contemplating income withdrawal as a retirement option are detailed in Income Withdrawal Advantages and Disadvantages.