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9 Income drawdown 9.1 Definition Some defined contribution arrangements allow for income drawdown. Under such an arrangement instead of buying an annuity the fund remains invested and the member withdraws an amount of the fund each year. This may be just the income earned on the fund or may also include some of the fund capital. It is usual for this income drawdown product to be offered by an insurance company. At retirement the member ie individual will transfer their accumulated fund from their defined contribution arrangement to the income drawdown product. Income drawdown is unlikely to be suitable for individuals with small accumulated funds, as the charges imposed by the insurance company to manage the income drawdown product can be significant. There may be legislative restrictions on the amount of the fund that can be withdrawn each year, age at which drawdown must cease and a pension ie an annuity must be purchased. 9.2 Use to meet customers needs One of the main drivers behind the income drawdown approach is that, should the member die before having to secure an annuity, the members heirs can inherit the balance of the fund. If instead an annuity were to be purchased then the insurer would profit from the early death of the member. Advantages of income drawdown include The member may be able to earn a return on their invested funds after tax and charges in excess of that underlying annuity rates. The member has flexibility within the legislative requirements in terms of how much to take each year as an income. Annuity rates may currently be poor but improve in the future at which time the member may be required by legislation, or chooses, to buy an annuity. However, income drawdown carries several risks for the member if only the income earned on the fund is taken each year the members income could be volatile, if too high a level of income is taken, the capital could potentially reduce to zero before the member dies leaving the member dependent on the State at the end of their life, the charges taken in relation to administering the arrangement may be high, the remaining fund on the members death may be insufficient to provide adequate benefits for a dependant, there may be a tax charge on the residual fund on the members death. 9.3 Existence of a group version The income drawdown product will be sold to individuals as a way of meeting their retirement needs.