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Income drawdown came about as the result of the “pension freedoms” legislation of April 2015.  Before that date, most of a pension fund had to be used to buy an annuity.  Annuities are basically guaranteed incomes for life. 

The annuity system worked well when life-expectancy was shorter and hence retirement tended to be measured in years rather than decades.  These days, however, its inflexible nature can make it unsuitable for people who expect a lengthy retirement and, hence, at least the potential for there to be significant changes in their circumstances.

Income drawdown basically allows a pension fund to be used in much the same way as a regular investment fund.  You can live off the income it generates and you can pass it on to your heirs when you die.

This allows massively more flexibility, albeit at the price of more risk.  The returns from annuities are guaranteed, investment returns are not.  What’s more, the purchase of an annuity is a one-off expense, whereas income drawdown tends to generate ongoing administrative charges.  Income drawdown, therefore, tends to be best suited to higher net-worth individuals who can absorb the investment risk.

 

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