Pictured above: Kevin M Jenkins

From 6 April 2011 a new set of pension rules will come into force which will give greater flexibility and control over pension options at the point of retirement.

Converting pension savings into retirement income is one of the most complex financial decisions many individuals face. The vast majority of people purchase an annuity to convert their pension savings into retirement income as traditional drawdown strategies are high risk and are only considered suitable as part of an overall retirement strategy for those who have higher levels of funds available.  

There are fundamental differences between buying an annuity and taking drawdown. An annuity converts a pension fund into a guaranteed income for life, whereas with drawdown, income payments are taken direct from the pension fund which remains invested in the stock market. This means that with an annuity, you can never run out of income, but with drawdown, your pension fund can be eroded over time, meaning you could end up with less income. When you and your partner die, income payments from an annuity stop, but with drawdown any remaining sum can be paid to your beneficiaries.

As part of a host of pension reforms coming into effect next month there will be the introduction of a new 'flexible' drawdown option.

Kevin M Jenkins, a Lichfield based independent financial adviser with Key Financial Management which is a trading name of 2plan Ltd commented: "Those who have an annual secure income of at least £20,000 per annum, will be able to drawdown an unlimited amount from their pension with 25% being tax free and the remainder being treated as income for tax purposes. 

"The £20,000 annual income can be made up from State Pension and Pension annuity income from a number of different pension arrangements.

"This may well be attractive to those currently paying higher rate tax on earned income and who could see their income reducing in retirement. It may be possible to make pension contributions with the higher levels of tax relief now and have a more flexible access to the pension fund, drawing 25% of the pot tax free and then paying lower rate tax whilst 'drawing down' the remainder of the pension during retirement."

Drawdown tends to only be suitable for those who have funds in excess of £100,000 as a minimum, because there is considerably more risk and complexity with these types of retirement products. It is therefore vital for you to seek specialist independent financial advice when you are considering your retirement planning. 

To see if you qualify for the £20,000 annual income upon retirement you can obtain a State Pension forecast, value all your Pension Benefits (Final Salary and Money Purchase including personal pensions), trace any lost pensions from former employers and personal arrangements and determine the potential tax relief available for any pension contributions.