A:

A drawdown arrangement is most frequently associated with pension funds and how retirement income is received. The principle concept of a drawdown arrangement can be applied to any pool of money. These arrangements allow the recipient a greater degree of flexibility with income withdrawals and leave the possibility of a lump sum for a beneficiary. However, drawdown arrangements do not guarantee income for life and do not completely protect against market risk.

How a Drawdown Works

A standard drawdown option on pension funds is restricted to those who are between 55 and 65 years old. Typically, a lump sum of invested money is transferred to a new account that is managed by an insurance company, the government or another financial institution. The assets can be invested again, and the account owner is eligible to receive ("draw") a percentage of the pensioned funds every six or 12 months.

The standard drawdown arrangement does not require a minimum drawdown amount, as with other pension receipt schemes. For a fee, some protect against loss of investment principal from year to year or guarantee a small appreciation.

There are many types of drawdown arrangements available in U.S. and foreign investment markets. In many countries, such as the United Kingdom, drawdown arrangements are an important component of allowable retirement options.

Drawdown Arrangements in the United Kingdom

The Financial Conduct Authority (FCA) has created a legal right for any pension holder to purchase an annuity or enter into a drawdown arrangement upon reaching the age of 55.

The purpose of this legislation is to prevent consumers from choosing unsecured pensions as an only option. These drawdown pensions come in a few different forms, such as capped or flexible drawdowns, and can be taken out with approved institutions.

RELATED FAQS
  1. What is the difference between a drawdown in banking and a drawdown in trading?

    Understand the two completely different meanings of the term ''drawdown'' as it is applied within the contexts of trading ... Read Answer >>
  2. How do drawdowns help assess investment risk?

    Learn how the concepts of drawdowns and maximum drawdowns are used in the analysis of risk, as well as in the building of ... Read Answer >>
  3. What is the difference between a drawdown magnitude and drawdown duration?

    Learn about the two different measures of drawdown, magnitude and duration, and why it's critical for traders to understand ... Read Answer >>
  4. How does a pension income drawdown work?

    Understand what a pension income drawdown plan is, and learn the current rules governing pension income drawdown plans in ... Read Answer >>
  5. What trading strategies help investors withstand a drawdown?

    Understand the concept of drawdown and the importance for traders of having a trading strategy that takes temporary drawdown ... Read Answer >>
  6. What is the difference between drawdown and disbursement?

    Learn about some of the many definitions for financial drawdowns and disbursements, which represent transfers of funds between ... Read Answer >>
Related Articles
  1. Investing

    What's a Drawdown?

    A drawdown is usually expressed as a percentage change between the peak price and the low price (trough) of an investment.
  2. Investing

    How the "Buy the Dip" Mentality in the Stock Market May Fade

    Consider portfolio changes for a sustained stock market drawdown, with the S&P 500 near its record high, stock valuations stretched and economic growth slowing.
  3. Financial Advisor

    Pension Advances: What You Should Be Wary Of

    The terms some pension advance firms require can be costly. Here's how to be sure your clients aren't making bad decisions.
  4. Retirement

    How Americans Struggle with Retirement

    While some struggle to plan a drawdown schedule, others may not be able to afford retirement at all.
  5. Investing

    Don't Let Valuations Drive Your Investing Decisions

    Base your investment decisions on data, processes and risk rather than on valuations.
  6. Retirement

    Executive Retirement: Pension vs. Lump Sum

    Choosing between these two options requires making an educated guess about your lifespan and understanding your tolerance for investment risk.
  7. Retirement

    Lifetime Income or Lump Sum Payment: Which Is Best?

    If your pension is being eliminated, should you take the lump sum or lifetime income option?
  8. Retirement

    Pension Plans: Pain Or Pleasure?

    Employees have a love/hate relationship with this retirement option.
  9. Financial Advisor

    How to Help Clients Navigate Pension Payments

    Financial advisors play a key role in helping clients make critical pension decisions. Here are some tips to help clients make the right choices.
RELATED TERMS
  1. Drawdown

    The peak-to-trough decline during a specific record period of ...
  2. Drawdown Percentage

    The portion of a retirement account that a retiree withdraws ...
  3. Return Over Maximum Drawdown (RoMaD)

    Return over Maximum Drawdown (RoMaD) is a risk-adjusted return ...
  4. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  5. MAR Ratio

    A measurement of returns adjusted for risk that can be used to ...
  6. Peak-To-Valley Drawdown

    A fund or money manager's largest cumulative percentage decline ...
Hot Definitions
  1. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  2. Current Account

    The difference between a nation’s savings and its investment. The current account is defined as the sum of goods and services ...
  3. Liability

    Liabilities are defined as a company's legal debts or obligations that arise during the course of business operations.
  4. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  5. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  6. Private Equity

    Private Equity is equity capital that is not quoted on a public exchange. Private equity consists of investors and funds ...
Trading Center