Fact Service October 2013

Issue 40

Drawdown of pensions

On retirement, people with money purchase pension schemes can buy an annuity or enter an income drawdown arrangement.

A House of Commons Library research briefing has examined developments in drawdown policy in recent years.

Individuals with money purchase pensions — also called defined contribution schemes — build up a pension fund using contributions, investment returns (if any) and tax relief.

At retirement, they have the option of buying an annuity, which pays an income for the rest of their life, and/or income drawdown, under which people can draw some income from their fund each year and leave the rest of it invested.

The coalition government legislated so that people would be allowed to leave their pension funds invested in a drawdown arrangement, from which they could make withdrawals throughout retirement. Those who could demonstrate that they had a secure pension income for life of at least £20,000 a year would be able to make unlimited withdrawals (“flexible drawdown”).

Others would have the option of “capped drawdown”. To reduce the risk of individuals exhausting their savings prematurely, the maximum withdrawal reduced from 120% of a comparable annuity to 100% in April 2011.

The briefing looks at recent changes and press reports on these changes, as well as providing links for further information.

www.parliament.uk/briefing-papers/SN00712/pensions-income-drawdown