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

The maximum level of income you can draw each year will be 120% of a ‘basis amount 'calculated in a manner determined by HM Revenue & Customs (formerly the Inland Revenue). This is known as a GAD calculation, as the tables determining the maximum income are produced by the Government Actuary's Department.

In practice the basis amount was intended to be roughly equivalent to the maximum single life level annuity you could buy with the same fund on the open market, although this will vary over time. 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. 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. 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. You can also request that a review takes place on an anniversary of going into drawdown. This will start a new five year period.

By age 75 you must have bought an annuity. If you have not done so your fund will be moved into ASP. Read more about ASP.