Planned increases in the state pension age are likely to lead many to use income drawdown in their retirement planning, as they seek out ways to tap into their personal pension before they reach state pension age.
Changes in state pension age
The state pension age is now 65 for men and 60 for women.
For women it will rise to 65 between 2010 and 2020. Then it will rise, for both sexes, to 66 between 2024 and 2026, to 67 between 2034 and 2036, and to 68 between 2044 and 2046.
These rises could be introduced sooner, depending on the outcome of the general election, as the Conservatives have expressed a desire to push forward change as quickly as possible.
As a result, those wishing to retire early may have several years to fund themselves, in order to bridge the gap until the state pension becomes available to them.
Income drawdown
With this end in mind, many may consider income drawdown as an alternative to the traditional annuity, which is available for ten years, until the purchase of an annuity becomes compulsory at the age of 75.
With income drawdown your savings remain invested in the stock market, making it a more risky strategy than purchasing an annuity right away.
Additionally, there are several other important issues to consider, before taking the income drawdown option.
With income drawdown, you can take or drawdown larger amounts from your pension savings, compared to what you would have had from an annuity payment. You can also choose to take lesser amounts, or none at all from time to time, making this a good option for those who are continuing to work part-time, for example.
With income drawdown, your income is taxed on a PAYE basis. However, your pension remains your money, and can be left to your family if you die, whereas if you had bought an annuity your money would become the property of the insurance company.
With income drawdown, you are dipping into your pension pot. This means that, if you draw down more than the yield from your investments in any given year, you are eating into the capital in your fund. This is why, in recent years, many pensioners who drew freely on their savings as stock markets were in decline were eroding the total amount of their retirement savings.
