How does income drawdown work?

Firstly, you decide how much of your SIPP fund you want to move into drawdown. You can then normally take up to 25% of this as a tax-free lump sum and draw a regular income from the rest.

There is no minimum withdrawal amount - so you could choose zero income if you wish. Any income is subject to tax at source, on a Pay As You Earn (PAYE) basis.

You decide where the remainder of the fund is invested, and you should review and monitor the situation regularly.

The maximum income you can draw can be more than the income from a level, single life annuity bought using the same fund. The maximum is calculated at the start of your drawdown plan using GAD (government actuary department) tables which use your age and 15 year gilt yields to calculate the income available from your fund. The income limits calculated at this point are fixed until the next review.

If you smoke, or suffer from ill health, an annuity income could be higher than the GAD limit allowed under income drawdown, as the GAD calculation does not take health or lifestyle into account.

As long as you stay within the maximum limit you can control how much income you take, and when you take it.

At least every five years we are required to review your plan and recalculate the maximum annual amount you can withdraw from your income drawdown plan. This is known as a five year review. After each review we will tell you the new annual GAD limit, which could be lower or higher than the limit from the previous five years.

A review will also be triggered if you switch any more money into your drawdown account from your main pension fund, or if you take money out to buy an annuity. Each year you may request that a review takes place on the plan anniversary. This will restart the five year period. In some cases funds may also have to be moved out as a result of a divorce court order and this will also trigger a review.