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.

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