Flexibility & Choice

Unsecured income, also known as "income drawdown" or "income withdrawal" or even "pension fund withdrawal", is an alternative to buying an annuity. It is generally only suitable for people with funds over £100,000, and is available to those under the age of 75.

As the name suggests, the income is withdrawn from the pension, rather than investing in a traditional annuity. Providing the levels of withdrawals do not exceed the growth of the fund, the fund value should increase. It allows you to take the tax-free cash from your fund and a flexible income.

The level of income you can withdraw depends on two factors, the value of the fund, and "GAD" rates. GAD rates, are set each month by he Governments Actuaries Department, and are linked to gilt yields. The amount of income you can withdraw is the maximum allowed by the GAD rates (which is roughly equivalent to a single life annuity), but there is no minimum, so you don't have to take any income. The income is of course taxable, but can be varied between these two levels to suit your circumstances.

The advantages are that it defers annuity purchase. You don't have to decide whether to buy a joint life annuity or any other option. The fund value could also increase and annuity rates may get better. Additionally, unlike traditional annuity purchase in the event of death the funds can be paid out as a lump sum, (less tax at a rate of 35%).

However, there are some risks. There is the risk that the fund could fall in value, and annuity rates could also drop. There is also the loss of a cross-subsidy, which you receive when you purchase an annuity. With an annuity, some people will not get their money back because they will die relatively soon, whereas those who live longer will get more than their initial investment in regular payments, and they will have been subsidised by those who died earlier. This is the cross-subsidy, and its loss in income drawdown is known as the mortality drag.

Despite seeming complex the principle behind income drawdown is simple. You don't buy an annuity, but take an income from your pension. If it grows by more than you take out, the fund grows.

Alternatively Secured Pension (ASP) is a new type of contract introduced in April 2006. It is a type of income drawdown contract for those over the age of 75. There are however some key differences, and key disadvantages. With ASP:

• The maximum income is 70% of GAD rates for a 75 year old, even if you're older
• On death during ASP the remaining fund can not be paid to the estate
• The remaining fund can be passed to others but only through a pension
• On death the fund is potentially liable to inheritance tax (unless it was used for a financial dependent)
• The income levels are reviewed every year
• All tax-free cash must be taken before the ASP contract begins - otherwise it is lost

The death benefits under ASP are not as beneficial as under income drawdown, since the remaining fund can not be paid out to your estate. The remaining fund can be passed on through a pension, but potentially subject to inheritance tax. 

The maximum income from an ASP would be lower than the maximum income from an income drawdown contract of the same fund value, and a single life annuity purchased with the same fund value,  since the withdrawals are capped at 70% of the GAD rate.

The two main advantages of an ASP contract are that for the first time ever it enables investors at age 75 and above, to take an income from their pension without buying an annuity, and provides a lump sum death benefit which can be passed on to others. Before April 2006, purchasing an annuity at age 75 was compulsory, and there would have been no death benefits other than the option of building in a spouse's pension and a maximum guarantee period of 10 years.

If you would like to know more about income drawdown or alternatively secured pension, then please do not hesitate to contact us, so that we can discuss your options in more detail, and provide you with more information.