Income Withdrawal, also sometimes referred to as income drawdown is a means by which a pension fund can provide tax-free cash and, if required, a regular retirement income.  Iincome withdrawal / income drawdown has become the preferred choice for people with pension funds greater than £50,000 who are ready to take the benefits from their pensions.

The tax-free cash element of retirement benefits is very important to many individuals since it can repay debts including mortgage debt and cover major expenses.  It is often used to clear up finances prior to retirement.  Since April 2006, 25% of any pension fund can be used to provide tax-free cash.

Income Withdrawal / Income drawdown is a means to unlock tax-free cash.

Through Income Withdrawal / Income drawdown, tax-free cash to be taken whilst the remaining pension fund stays invested.  This can allow individuals a valuable financial lifeline of using tax-free cash to cover large expenses or repay loans or mortgages whilst leaving 75% or more of the pension fund intact for the future.  This gives the remaining pension fund more time to grow and allows the individual to take advantage of higher annuity rates at a later age.

Tax-free cash may be drawn whilst the individual is still working and earning whilst the retirement income can be deferred until the future, possible helping to avoid paying income tax.  For example a higher rate taxpayer might have an urgent need for tax-free cash but would not wish to draw a retirement income which would all be subject to higher rate tax.  Better to take no income now, via an Income withdrawal / income drawdown plan and draw a higher income in the future when possibly he or she might even be a non-taxpayer.  Why give a way 40% (Higher rate tax 2007-2008) when you do not need to?

So in concusion one major advantage of income withdrawal / income drawdown is the ability to access tax free cash and keep the pension fund intact, invested and growing for the provision of future, more tax-efficient income.

A word of caution however.  A good lesson in financial planning is that money is hard to save but easy to spend.  Tax-free cash is part of retirement benefits, if used for other things it can leave you short of vital cash and income in retirement.

Ideally tax-free cash drawn from a pension should be invested for income and growth over the long term.

The drawing of tax-free cash at or before retirement is a crucial financial decision and Financial Adviser Hertfordshire recommends you consult with an Indepenent Financial Adviser who will be able to consider your level of income youshould draw, the overall financial position and take account of the complexities of income tax, the cost of mortgage and other loan finance as well as the inheritance tax implications that should be considered.