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Income drawdown

Frequently asked questions

Our income drawdown options are available through the Aviva Pension Portfolio. It can only be purchased through your financial adviser. If you don't have a financial adviser, you can find one in your area at www.unbiased.co.uk.

It's important to understand all the facts about income drawdown before you take this option. So, we've put together some easy-to-follow frequently asked income drawdown questions and answers.

Remember: New income drawdown rules offering more flexibility to investors are being introduced by the government in April 2015, so you may wish to discuss these changes with your financial adviser.

What is income drawdown?

Income drawdown is a way of taking an income from the money you've built up in your pension fund. You can use the money you take from income drawdown to retire fully or semi-retire and supplement your earned income.

While you're making withdrawals from your pension fund, the remainder of your fund continues to be invested, giving it the potential for growth, free of UK income and capital gains tax. Corporation tax is paid on dividends received from UK shares. However, the value of the fund can go down as well as up and is not guaranteed, so you may not get back what you have invested.

Are you eligible?

You can use income drawdown if you're over 55.

You can transfer money from any pension fund(s) to income drawdown. To take out Aviva's income drawdown, you need a minimum of £30,000 in your pension fund(s).

You should discuss your retirement options and take advice from a financial adviser before investing in income drawdown.

Is this plan the same as a personal pension?

No. Unlike a conventional personal pension, which is used to build up your pension fund until you reach your chosen retirement age, income drawdown is used to pay you an income once you decide to retire or semi-retire.

The remainder of your fund remains invested, rather than using it to buy an annuity. You can also use income drawdown to supplement your income if you wish to semi-retire.

What are the charges?

There may be charges for managing the funds or investments you choose and your financial adviser is also likely to make a charge to cover the cost of their advice.

If you decide that income drawdown from Aviva is right for you, your financial adviser will provide you with more information on the charges and explain how they work.

How much can you invest?

There is no upper limit to the amount you can invest. To set up income drawdown with Aviva, you need a minimum of £30,000. You may be able to take a tax-free cash lump sum (normally 25%) from each payment you make .

Once you've invested, can you start taking income straight away?

Yes, you can start taking income straight away if you're 55 or over. Or, you can choose to just take your tax-free cash lump sum and wait to take any regular income at a time that's right for you. Your money could still benefit from further growth potential from the funds in which it's invested.

How often can you take your income?

Once you decide you want to take an income using income drawdown, you can usually choose to take the income monthly, quarterly, half-yearly or yearly.

How much income can you take?

The maximum amount you can take as an income depends on whether you have capped or flexible drawdown.

Capped drawdown means the income you can take is subject to maximum limits set by the Government.

The amount of yearly income you take through capped drawdown must be reviewed at least every three years (annually once you reach age 75). Your financial adviser will help you work out how much income you could take. This will depend on your own individual circumstances and factors such as your age and the amount of your pension fund. We recommend that you review your drawdown arrangement each year with your adviser to make sure that you don't take more income from your pension fund than it can sustain. If investment returns are poor or you take a higher level of income than can be sustained by your pension fund, the value of your fund may reduce significantly. This can result in a lower income in the future, or in the worst case, you could run out of money.

Flexible drawdown means you’re not restricted by income limits set by the Government. To be eligible for flexible drawdown you must meet a number of rules set by the Government. Speak to your financial adviser to see if you're eligible for flexible drawdown.

As there is no set minimum level for capped or flexible drawdown, you could delay taking an income and simply take your tax-free cash lump sum.

Can you still buy an annuity at a later date?

Yes, you can still buy an annuity at a later date. If you and your financial adviser decide that market conditions are suitable and that this option is right for your personal circumstances, you can use some of your fund, or all of it, to buy an annuity. An annuity will give you a secured income for as long as you live.

You can buy an annuity even if you've been using income drawdown previously. The amount of income you receive from your annuity depends on the amount of your fund, your age and the annuity rates available at the time you decide to buy.

What are the risks of delaying the purchase of an annuity?

It's important to remember that by using income drawdown to delay buying an annuity there's no guarantee that you'll end up with a higher amount of income in the future. Some of the factors that will affect your income from an annuity in the future are:

  • Annuity rates - these are not constant and may vary up or down

  • Future investment returns - these are unknown

  • The level of income you take from income drawdown - the more you take, the less you'll have to buy an annuity.

What happens if you die?

The way we pay your benefits depends on whether you have any dependants when you die:

If you have dependants when you die, Aviva will choose how to distribute the benefits between them, unless you've already specified how you would like them distributed. Benefits may be paid as income or as a lump sum after deduction of tax (currently 55%). We'll normally allow your dependants to choose how they will receive the benefits.

However, you can tell us if you wish to nominate that a dependant should only receive an income on your death, instead of being able to choose.

If you have no dependants when you die, we'll pay the benefits as a cash lump sum under discretion. This means you can tell us who you'd like us to pay.

Your wishes are not binding, although we will bear them in mind when making the payment.

What are the tax rules?
  • Tax relief - All payments you make into income drawdown are transfers from other pension plans, so they're not eligible for any further tax relief. This is because you will already have received tax relief when you made the original payments into your pension plan.
  • Lifetime Allowance - The Lifetime Allowance is the amount of money you can take from all your pension plans without losing the tax advantages. Any amount above this allowance will be subject to a tax charge when benefits are paid - or when you reach the age of 75, if earlier.

As well as the amount you're currently building up in your pension plan(s), the Lifetime Allowance also takes into account the cash value of any pension income already being paid to you and any tax-free lump sums you've received.

If you already have pension funds that exceed the Lifetime Allowance, or you think you may exceed it in the future, you should talk to your financial adviser before taking out this plan.

  • Crystallisation events - Crystallisation is a term used to describe when you take benefits from your pension plan - for example, moving into income drawdown.

This includes delaying taking your income but taking your tax-free cash. Your benefits will be measured against the Lifetime Allowance when a crystallisation event occurs. You may be charged tax if the value of benefits from all your pension plans exceeds the Lifetime Allowance.

  • How your income is taxed - income you take through income drawdown is taxed in the same way as earned income. We'll deduct Pay As You Earn (PAYE) tax from your pension income before paying it to you.

Any statement about tax liability is based on our understanding of current law and tax practice. Future changes in law and tax practice could affect how much your fund is worth and your tax liability. Your fund could also be affected by changes in your personal financial circumstances.

How do you apply?

Find out more about how to apply for income drawdown with Aviva through the Pension Portfolio. The first step is to talk it through with your financial adviser to make sure it's the right retirement income option for you.

If you don't have an adviser, you can find one in your area at www.unbiased.co.uk.

WC03041 10/2014