Income Withdrawal Advantages and Disadvantages

If you are considering income withdrawal to provide an annual retirement income, there are several advantages and disadvantages to bear in mind whilst making your decision. 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.

Advantages

• you can influence what happens to your pension fund post-retirement, for example, you may be able to choose how
• your fund is invested, and you do not need to 'sell' your whole fund to an insurance company
• you do not have to purchase an annuity (see Annuities); if you are uncomfortable with estimating how long
• you will live, or if your religion forbids such estimates, you can have a retirement income based solely on the performance of your investments
• your pension fund remains intact, unsold, to provide for your loved ones in the event of your death; it may be subject to tax or certain charges, but your survivors can inherit your remaining fund (see Pension in event of a Death)
• your pension fund remains intact, unsold, to provide pensions for your survivors in the event of your death; your loved ones can use your remaining pension fund to purchase an annuity of their own
• you are not beholden to withdraw any set amount of money; if you would prefer to leave your pension fund untouched, or draw a small amount of money whilst you continue to work, you can do so
• you are entitled to a tax-free lump sum before the remaining pension fund is invested; if you would like a financial boost for a specific reason, such as renovating your home, you can use the tax-free lump sum but leave the remaining fund intact to use to provide income later on
• initially you are entitled to a more generous annual income than you would have received from a regular annuity
• you can defer purchasing an annuity if you have been quoted a low rate, perhaps if you are retiring young, there is an economic slump, or there are low annuity rates, until you have the chance of a more favourable annuity
• you can withdraw a different amount from your pension fund each year, up to a maximum, and thus adapt your retirement income to suit your personal circumstances
• you can still choose to purchase an annuity at a later date if your circumstances change or you decide to opt for a regular income

Disadvantages

• you will be required to pay charges for pension fund management and administration; since your pension fund is now invested, someone will have the responsibility of monitoring your investments and your withdrawals, and you will have to pay for this service
• if your pension fund is fairly small, there is a chance you will lose more money than you make from investment returns and end up with very little relatively quickly
• you are swapping the relative security of an annuity, promising an agreed amount of money each year, for the relative insecurity of the stock market, hoping that your investments will perform well enough to provide you with a reasonable income
• you risk losing a part of your pension fund if the stock market crashes
• you are no longer guaranteed an annual income until you die; if your pension fund runs out before your death, you will need to rely on other sources of income to cover the cost of living
• you no longer have insurance against living a long life; if you purchase an annuity, you are entitled to continue receiving money until you die, but if you die, your remaining pension fund will be used to cover the cost of other people's ongoing annuities. Similarly, if you live on when your pension fund has been used up, other peoples' funds will pay your annuity.
• if you opt for income withdrawal, you can only draw money if you have remaining pension fund; once it's gone, it's gone
• if your investment returns are lower than expected, your maximum income withdrawal will also be reduced accordingly
• if you die whilst using income withdrawal before age seventy-five and you are considered to have opted for income withdrawal in order to evade inheritance tax, your remaining pension fund may be subject to inheritance tax; if you die whilst using income withdrawal after age seventy-five, your remaining pension fund will be subject to inheritance tax unless your survivors use it to purchase pensions for themselves
• you will need to continuously review your circumstances and the options available to you to ensure that income withdrawal is still your best option; this will cost time and worry as well as money, when you require the assistance of an independent financial advisor
• after age seventy-five you will be entitled to less money than you would have received from a standard annuity