With income drawdown, unlike a traditional pension annuity, the pension fund is not used to purchase a guaranteed income. Instead the pension fund is reinvested in a range of assets and a variable income is taken from this fund. The level of income that can be taken from income drawdown plans is limited by the Government Actuary Department (GAD). Income drawn from the fund must be within the maximum and minimum limits set by the GAD. Income drawdown is a short to medium term alternative to buying an annuity. Once a person reaches the age of 75 it is compulsory for them to take out an annuity policy.
As the value of the pension fund can go down as well as up income drawdown is considered to be more risky than traditional annuities. There is a further risk in that in the future annuity rates may be lower and so by not purchasing an annuity now there is a possibility of losing out.
The risk associated with any drawdown plan is measured using a formula known as critical yield. Critical yield shows how much the invested pension fund must grow each year to be able to provide the income the policy holder wishes to take each year and maintain this income at the age of 75 when the person purchases their annuity. In simple terms the lower the critical yield associated with a plan the less risky it involves.
As an alternative to annuities income drawdown isn't suitable for everyone. However for people with large pension funds or those who have another source of secured income it can be a good option.
Based in the UK, Annuities4U provide independent pension annuity and income drawdown advice to clients nationwide. We help our clients to find the best annuity and income drawdown quotes available.
Article Source: http://EzineArticles.com/?expert=Rich_Bendall
Posts
