Choosing The Right Option At Retirement – Capped Income Drawdown (Part 2)

Capped Income Drawdown

In part 1 of the article on Capped Income Drawdown, we took a look at the fundamentals of this method of facilitating retirement income. Here in our second piece, we examine the opportunities, advantages and disadvantages of Capped Drawdown.

The circumstances where this may be considered to be appropriate and / or advantageous are: –

  • To provide for maximum tax free cash at the outset whilst providing no income – Indeed, for some considerable time this was the sole option of doing so and a number of clients we have acted for have undertaken it for this very reason. However, even where income is not required, there may be advantages of recycling surplus income (not tax-free cash) back into pension. If so, other income options may come into consideration.
  • To provide for a flexible level of income – This may be in situations where an individual is slowly phasing into retirement, perhaps going part time before fully retiring, or where they enjoy multiple sources of income and can take a holistic approach to their retirement income planning. However, this is no longer the only option of providing some flexibility as phased retirement is an alternative. Furthermore, some investment-linked annuities also do so.
  • Where an individual wishes to defer annuity purchase – Whilst compulsory annuitisation has now been abolished, nonetheless annuitisation is still a popular choice for the more cautious individual in retirement. However, deferment of such a decision may be for reasons of their own or their spouse / civil partner’s age, particularly when retiring relatively young. Alternatively, this may perhaps be for health reasons, where the life expectancy of the individual or widow /widower is uncertain.
  • Where a sophisticated investor wishes to retain their pension fund invested – This would usually be in assets such as property (including a physical property through a SIPP) or equities as predominant investment into lower risk / potentially lower return assets such as cash and fixed interest investments such as gilts and corporate bonds are unlikely to be suitable. An example where this may also be beneficial is where the value of a pension fund has dipped and the retiring individual wishes to defer annuitising until such time as their fund potentially recovers but they do not wish to postpone retiring until that occurs.
  • To provide greater death benefits than are available through an annuity – This may appeal where individuals wish to make available lump sum death benefits, although the corresponding 55% tax charge is an important factor take into account.

Whilst these plans have many advantages, one should be aware that they are complex investments which should only be considered with the benefit of professional, independent financial advice. Indeed, these investments are not suitable for everyone and they have their disadvantages.

There are relatively high associated administrative and advice costs and as such they are generally only suitable for those with funds in excess of £100,000, although a number of providers will accept lesser amounts.

Clearly there is an attaching investment risk and, therefore, careful consideration needs to be given to creating a balance between this risk and the need to return performance adequate to cover inherent charges and mortality risk, including the possibility that annuity rates may not increase with age as expected.

Every individual’s circumstances are different. If you would like to discuss your own retirement income planning, please do not hesitate to contact us for a free consultation.