Income Drawdown

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

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 an income drawdown plan 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.

Are you eligible?

You can take out an income drawdown plan if you're over 55 and before you reach the age of 73.

You can transfer money from any pension fund to an Income Drawdown plan, but you'll usually need a minimum amount of £50,000.

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

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 plans are 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 are charges that are taken for managing your plan, and there may also be charges for managing the funds or investments you choose to invest in. Your financial adviser is also likely to make a charge to cover the cost of their advice.

If you decide that an Aviva income drawdown plan 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?

To set up an income drawdown plan, you'll usually need a minimum of £50,000, after tax free cash has been paid. You may be able to take a tax-free cash lump sum (normally up to 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. Or, you can choose to just take your tax-free cash lump sum and wait to take any regular income until the time is right for you. Your money will 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 income from your income drawdown plan, 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 income in a year is subject to a limit set by the Government. As there's no set minimum level, you could delay taking an income and simply take your tax-free cash lump sum.

The maximum amount of yearly income you take will need to be recalculated every three years and yearly after 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 plan 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.

Can you still buy an annuity?

Yes, you can still buy an annuity. 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 your income drawdown plan - 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 a pension 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 an income drawdown plan 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. The Lifetime Allowance is £1,500,000 in the tax year 2012/2013.

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 pensions 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 plan is worth and your tax liability. Your plan could also be affected by changes in your personal financial circumstances.

How do you apply?

Find out more about how to apply for an income drawdown plan. The first step is to talk it through with your financial adviser to make sure it's the right type of retirement income plan for you.

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

WC03041 04/2012