There are a number of different types of draw-down structures: Income drawdown commences when the individual designates funds for it.
Any withdrawals will allow 25% to be taken tax free with the remaining 75% of the fund treated as taxable income.
Originally the minimum and maximum withdrawal rate was set at 35% and 100% of an amount that broadly reflected the annuity that could have been bought based on a single life basis with no annual increases.
To prevent the erosion of capital a review was conducted every third anniversary, with new limits being set based on the individual's age, the Gilt rate and fund size at the time.
After April 2011, drawdown has been reintroduced as the common term and those under 75 can withdraw up to 150% (120% prior to March 2014) of the GAD rate.
An income drawdown started before 6 April 2011 had to be converted to the new rules, or the pensioner had to purchase an annuity.
The limit applies to the total of payments taken as income withdrawal and short-term annuities[8] The new maximum amount of income that may be drawn is 150% (previously 120% pre 27/03/2014) of the single life annuity that a person of the same gender and age could purchase based on Government Actuary's Department rates.
In other words, one's pension provider calculates the maximum income the saver can receive, using standard tables prepared by the Government Actuary's Department.
There are many permutations, but they are beyond the scope of this article: for example part of a saver's pension savings can be used to buy an annuity Annuity (European financial arrangements) and part put into income drawdown; some or all of a saver's pension savings can be split, so creating separate sub-funds, which can then put into payment "crystallised" at different times.
[20] Even income drawdown in payment can be transferred to another pension scheme, subject to observing some conditions.
In fact, the scheme administrator should deduct Income Tax under PAYE (so the pensioner will only receive the net amount).
[Unlike the case where a drawdown pension is being paid using a short-term annuity, where there is a possible tax trap.
A key object of income draw-down is to structure the fund to allow the pensioner to benefit from future investment performance.
The excess return, which cannot be paid because of the operation of the cap, can be rolled up within the attractive pension tax wrapper.
A pensioner who buys an annuity hands over a capital sum and, in return, the insurance company pays the pensioner an amount stipulated under the annuity contract based on their life expectancy and the assumed returns on an underlying investment.
The contract is guaranteed by the insurer for life on the assumption that those living longest will receive the cross-subsidy of those who die earlier.
The other way that the pot can be depleted is if investment performance is poor, for example if stock markets go down significantly and withdrawals are not adjusted to take this into account.
If the individual dies before they reach the age of 75, they will be able to give their remaining defined contribution pension to anyone as a lump sum completely tax free, if it is in a drawdown account or uncrystallised.
There will also be an option to receive the pension as a lump sum payment, subject to a tax charge of 45%.
It was previously considered that 4% was a safe withdrawal rate (if the amount withdrawn was fixed at 4% of the portfolio value at retirement date and increased each year in line with inflation), but while that works across known history, it may no longer be true for today's extreme financial valuations.