Pension fund withdrawal (PFW), also known as drawdown, was introduced by the 1995 Finance Act.

It applies only to a personal pension plan and not to the older (pre-1 July 1988) retirement annuity policy.

That theoretical hurdle is easily overcome by transferring the retirement annuity plan to a personal pension plan.

In a more restricted form, PFW can apply to some occupational schemes.

The main expressed object of the introduction of PFW was for retiring policy holders to be able to avoid being locked into low annuity rates.

Since 1995 long-term interest rates - and thus annuity rates - have fallen further.

Interest rates and inflation could remain low for some years.What are the attractions of PFW? When to take benefits? Retirement benefits from a retirement annuity plan can only be taken between the ages of 60 and 75.

Benefits can be taken ten years earlier from a personal pension plan and drawdown is only available from such a plan.

It is important for clients to appreciate that retirement benefits do not have to be taken at the same time.

There can be inheritance tax and investment advantages in leaving some benefits undrawn - but that will expose the client to the risks of adverse investment performance and declining annuity returns.

All things being equal, it is generally better to draw a personal pension plan before a retirement annuity plan.

Retirement annuity plans are not subject to the earnings cap and the tax-free cash sum grows with increasing age: the tax-free cash is linked to the final annuity that can be drawn and annuity rates increase with age - assuming a level interest rate environment.

For many clients, a major consideration is the comparatively high value of a pension fund compared with other assets.

Once a pension annuity is purchased, the time ticks away to when the residual fund belongs to the annuity provider.

The cost of capital protection of either a pension or purchased life annuity is comparatively slight, and only in exceptional circumstances should it not be purchased.

The longest time a pension annuity can provide any form of capital protection is ten years.

As all pension funds must be used one way or the other by the age of 75, it follows that once a client reaches his or her 85th birthday, there is no longer a prospect of any capital sum coming back to the client's estate or family.

It is in this area where further changes might well come in the next year or so.

If the age cap of 75 were to be removed, this would encourage some clients to take up and remain with PFW to preserve the fund for their family (usually subject to a tax charge), as opposed to the fund going to the insurance company provider.SuitabilityIt is commonly accepted amongst advisers that PFW is only for the wealthier client; ideally a client who has other sources of income and may be prepared to take less than the maximum available.

Clients should ensure PFW is through a self-invested facility to enable investment advisers to be changed if required.

Commission on the initial transfer to begin PFW can be as high as 6% to 7% of fund value: a stark contrast to the 1% to 2% commission usually available on annuities.

To reach a decision to use PFW, a client needs to have very carefully considered all the other options.

For example, it is probable that many clients now using PFW were not aware of the availability of a with-profits annuity.

PFW is a comparatively high-risk approach and should be carefully explained.

The Personal Investment Authority has recently issued a memorandum (memorandum number 55) where very detailed instruction is given with a view to ensuring the risk is spelt out in considerable mathematical detail to clients considering this course.

If the tax-free lump sum of 25% of the fund value is to be taken, it should be taken when PFW first begins.

If it is not then taken, it cannot be taken later.

It is often possible for this sum to be used to make a final pension contribution using unused pension reliefs and obtain income tax relief at the client's top rate.

That additional fund could then be added to the PFW (producing another 25% tax-free lump sum).

What is the benefit? How much can be drawn depends on tables produced by the government actuary's department.

These tables provide a maximum withdrawal factor which is based on long-dated gilt yields.

That factor is applied to the pension fund.

The m inimum withdrawal factor is 35% of the maximum figure.

The maximum amount is based on a level single life annuity payable with no guaranteed period monthly in arrears and at the appropriate rate for the age of the client at the start of the withdrawal period.

There is a statutory requirement to review every three years.

Advisers generally accept that almost continuous monitoring is necessary.Some dangersThe danger of pension fund withdrawal for clients with no other sources of retirement income, is akin to Russian roulette.

This is because:-- For the fund to have a good chance of growth, it needs high equity exposure.

The fund may fall in value.-- Growth has to cover the charges and loss of mortality drag.

Mortality drag is the increased annuity rate available because of the subsidy those who die early give to those who survive longer.-- Annuity rates may not improve - indeed (as has happened) they may deteriorate.Some advantagesPFW can be attractive for clients who:-- want to preserve as much as possible of their pension fund for beneficiaries but still take take an income from it.-- Accept the risks, have other income sources and may have flexible requirements-- are comparatively young, ie, in their early 50s, and want to draw some benefits.

Annuity rates would be very low at that age.-- Are in poor health, need some income but want to preserve funds for beneficiaries (but compare with a capital protected impaired life annuity).-- Want to make provision for partners to whom they are not married - where it may be difficult to show financial dependence.Death during PFWOn the death of a client enjoying PFW there are various options available to the client's spouse or other dependents.

These are broadly:-- Continue with PFW.

It must cease, ie.

an annuity must be purchased at the earlier of the 75th birthday of the late client/living dependant.-- Buy an annuity.-- Take the fund as a lump sum subject to a 35% tax liability on the fund.-- A surviving spouse may defer taking an annuity until reaching the age of 60Clients should always consider just leaving some of their pension fund undrawn, because on death prior to the age of 75 there should be no tax liability at all.The futureIf we enter a sustained period of low interest rates, more and more clients will consider PFW as an option.

If the government granted greater flexibility and, for example, withdrew the age restriction on when an annuity must be taken, this option would become more attractive for more people (but still risky).

If with middle-aged clients PFW is an option, some planning steps should be taken now.

There are more low-cost, commission-free, self-invested personal pension vehicles coming on to the market.

Costs can be squeezed out and an equity investment strategy started and continued into PFW.

Providing annuity rates were stable, a client just withdrawing income above the GAD minimum level would be less concerned about capital fluctuations.

With the FTSE average yield at just below 3% gross, that would need a very substantial fund.