An income drawdown is a simple way to withdraw benefits from any pension plan registered within the United Kingdom. Obviously, the primary benefit here is that such a scheme will enable the consumer to enjoy extra income should he or she fall upon hard times. So, what are a handful of the factors to keep in mind when considering this option?
The Performance of Underlying Assets
Most pension schemes will be invested in a certain number of underlying assets to accrue wealth. Why is this important? Should these assets perform poorly, the total amount of income which can be withdrawn can vary. In simpler terms, there is no "set" return and such investments can often be quite complex. It is important to understand where the money is being invested and what profits (within reason) are to be expected.
Capped Versus Flexible Plans
A capped income drawdown will only allow the consumer to take a certain amount of money out of a pension during any given financial year. A flexible plan is employed by those with a more secure plan for life. This variant has no restrictions in regards to how often the funds can be withdrawn. Although the flexible option offers more convenience, there is always the chance that too much money can be removed from the scheme itself. Capped plans are more predictable but they may not provide the amount of necessary liquidity. Both of these options should be carefully weighed against one another.
Levels of Risk
For those who wish to enjoy a robust and sustainable level of income, there may be times when a decidedly high-risk strategy is put into place. While it is true that the returns can be more substantial, the chances of negative performance are likewise heightened. So, only the most trusted providers should be selected. Furthermore, they must be abundantly clear where the money will be allocated. Is it funneled into blue-chip companies, on the open market or within the commodities sector? The best plans will normally give the customer a number of clearly defined choices.
To review, three extremely important factors to consider are:
- Where is the money being invested?
- Is a capped or an uncapped scheme the best option?
- Is a high-risk strategy desirable?
For those who are at or near the age of retirement, an income drawdown can be a useful strategy. Understanding these metrics is important to provide future financial security.