Income drawdown is an alternative to buying an annuity, where you leave your pension invested and draw an income from it.
Since April 2015 you don't have to use your pension pot to buy an annuity; there are alternative means of taking your retirement income. On reaching 55 you may now withdraw as much of the money as you wish to from the sum which you have saved into your pension.
You can use your pension pot to provide you with a regular retirement income by reinvesting it in funds specifically designed and managed for this purpose. Though the income you get will depend on the fund's performance. It isn't guaranteed income for life.
How income drawdown works
You can choose to take up to 25% (a quarter) of your pension pot or lower depending on what remains of your lifetime allowance as a tax-free lump sum known as a Pension commencement lump sum (PCLS). From the remaining crystallised pension pot this then allows an income to be withdrawn (which is subject to income tax at the marginal rate of income tax) to suit you. Most people use it to take a regular income, or for further withdrawals. The income received may be adjusted periodically depending on the performance of the investments and individual needs.
Uncrystallised funds pension lump sum, known as UFPLS (also called a FLUMP), is another way of taking pension benefits without going into drawdown or buying an annuity. It can be used to deplete the fund in one go, taking 25% tax free where this is within the remaining Lifetime Allowance and the remaining 75% taxable at the marginal rate of income tax as pension income under PAYE.
Risks of Income Drawdown
Income drawdown is an investment based solution rather than a guaranteed income. If you don't manage your income you could very easily run out of money from your pension pot, so it's important to carefully plan your annual drawdowns to ensure you don't spend it too soon.
Income drawdown is not guaranteed for life: you will only be able to obtain an income so long as you have a pension pot.
The value of investments and the income from them may go down. You may not get back the original amount invested.