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 as a tax free lump sum. You then move the rest into one or more funds that allow you to take an income (which is subject to tax) at times to suit you. Most people use it to take a regular income. The income you receive may be adjusted periodically depending on the performance of your investments.
Risks of Income Drawdown
Income drawdown is not guaranteed for life: you will only be able to obtain an income so long as you have a pension pot.
A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation.
Taking withdrawals may erode the capital value of the fund, especially if investment returns are poor and a high level of income is being taken. This could result in a lower income when the annuity is eventually purchased.
Annuity rates may be at a worse level when annuity purchase takes place.