Updated 03 September 2020
A pension drawdown can be helpful when you reach retirement and wish to access an income now rather than locking yourself into a lifetime annuity. Jeff Miller explains.
So-called “third way” drawdown plans will provide a guaranteed base income for life for the plan holder, and potentially for their dependents, within the drawdown regime. They also offer the potential of a rising income, and can provide a limit to any reduction in income in flat or negative investment conditions, when compared to a conventional drawdown plan.
“Many at-retirement income seekers may consider this a small price to pay for the benefit of the additional income at outset”
Pros and cons
The disadvantage of this type of plan is that the guaranteed income level is likely to be lower than the maximum available from a conventional drawdown plan, and also lower than a lifetime annuity, which is discouraging for at retirement clients. This leads many advisers to discount these plans as an option due to most clients needing or wanting the maximum possible income.
But, most third-way products do allow the plan holder to receive more than the maximum guaranteed income, but they do not guarantee the difference between the two.
Let’s assume that for a given age the maximum drawdown is currently 6 per cent per annum, and the guaranteed income offered under a third-way plan is 4 per cent per annum. The lifetime income of 4 per cent per annum will always be guaranteed, but the guaranteed income base of the plan may be reducing due to the drawing down of the additional 2 per cent per annum.
This is subject to underlying investment performance. Although underlying investment performance will not reduce the guaranteed income base, it could maintain or increase it.
Poor investment performance
In a scenario of flat or negative investment performance, the guaranteed income base, and consequently the level of guaranteed income, would be reducing annually by 2 per cent.
Many at-retirement income seekers may consider this a small price to pay for the benefit of the additional income at outset, when it is usually most needed or wanted, together with the guaranteed income base that these plans can provide.
You should always seek professional advice before entering into any retirement income plan.
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About the author
Jeff Miller is an independent financial adviser at Elementary Financial, an independent family-owned company. Jeff has over 25 years’ experience working in financial services and has worked in different sectors of the business, including: life assurance and specialist pensions.