Unsecured Pension (UP) replaced pension drawdown when the new rules for pensions
simplification came into force in April 2006. An Unsecured Pension allows you to make income withdrawals from your pension fund until age 75 instead
of buying an annuity.
After the age of 75 you must either buy an annuity or transfer to an Alternatively
Secured Pension.
The Advantages
Drawdown has many advantages but the most important are; income flexibility, investment control and choice of death benefit
- Income Flexibility
- Each year the amount of income taken can be varied between the minimum and maximum limits. Income can also be taken monthly, quarterly, half yearly or annually.
- Control over investments
- If drawdown is set up through a Self Invested Personal Pension there
is a wide range of investment options available.
- Choice of death benefits
- Unlike standard annuities where the only death benefits are available from a joint life annuity, drawdown offers a choice of death benefits.
The Disadvantages
The basic rules for drawdown are simple, but it is a complex option because
of the risks involved. When you buy an annuity you give up control of your
pension fund in return for a secure income. With drawdown you maintain control
of the pension fund but your income will not be secure and so it is a much
more risky option than buying an annuity.
- The value of investments may fall in value
- Annuity rates might fall
- No benefit from mortality cross subsidy