Before 1995, those people who had defined contribution pensions such company money purchase pension schemes, personal pensions and self invested personal pensions could only take a tax free lump and buy an annuity with the balance of the pension fund when retiring.
Pension Annuity – Lower Risk Secured Income
An annuity is an annualised income bought by a pension fund at retirement. The balance of your pension fund after any lump sum is either kept by your existing pension provider or via the ‘open market option’ (OMO) where you can shop around for the best annuity rate and you are usually then given a guaranteed income for life with various options for a spouse’s annuity (on death), guaranteed death benefit periods and either level income payments, income payments increasing by a fixed % or inflation linked increases. On the death of you (if a single life annuity) or death of you and your spouse (if a joint lives annuity), the pension fund is gone.
1995 – Pension Drawdown Starts
The government recognised in the 1990s that annuities were becoming less attractive due to lower annuity rates and people were being ‘put off’ saving into pensions as there was no flexibility. This is why pension drawdown was introduced.
1995 – Capped Drawdown
After taking any lump sum, with the balance of the pension fund, instead of buying an annuity, you now had the choice of buying a secured income annuity (low risk) or leaving your pension fund invested in funds to go down or up in value and could also draw down a regular amount or one-off amounts from the taxable balance of the pension fund with the balance left invested. On death, the balance of the fund was payable to your loved ones on premature death but by age 75 you must buy an annuity with any balance. This was appealing to many.
See Capped Drawdown: Capped Drawdown
2011 – Flexible Income Drawdown
In addition to capped drawdown, a new option called flexible income drawdown was introduced:
2014 – Flexible Income Drawdown Extended
In addition to capped drawdown, flexible income drawdown payments were made more widely available to lower retirement income consumers:
2015 – Flexible Access Drawdown
Flexible access drawdown was introduced for all.
See Flexible Drawdown: Flexible Drawdown
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