Income drawdown is a method of drawing money from your pension whilst leaving the fund invested. Someone who has a pension fund that is earning them a fairly substantial return may reach the age of 65 and want to start drawing money from their pension, without having to buy an annuity.
Income drawdown, also known as an ‘unsecured pension’, allows the consumer to draw money from the fund whilst leaving the rest invested. This may be particularly suitable for someone who owns commercial property through their pension fund, which they receive a good rate of rent on. If they decided to buy an annuity at 65, they would have to sell the property within the fund and take an annuity based upon them living through to around 82, the average life expectancy. Through income drawdown they could keep the property owned by their pension fund up until they were 75, using the rent paid on the property to live off for those ten years, and then sell the property 10 years later, probably at a higher price than they could have when they were 65. They could then use this money to purchase an annuity, in theory at a far better rate, as they would be expected to live for 10 years less.
This is an extreme situation, and other people may just have money invested in stocks that are performing well, and they will need to look at the rate at which annuity rates are decreasing each year. Whilst an extra 5 years of leaving a pension fund invested may increase its value by 10%, a drop in annuity rates over that period could counter its value increase and leave you worse off in the long run.
The biggest risk with income drawdown is that your money is not guaranteed, and if your investment fails or stops making money you are not guaranteed an income like you would be with an annuity.