10/10/2019

10 mins

Pension drawdown offers you the freedom to flexibly access your pension as and when you choose in the form of lump sums and income payments. For this reason, it’s known as flexi-access drawdown.

The pension freedoms opened up drawdown to a far wider number of people with defined contribution pensions than was ever the case previously, removing the need to purchase an annuity if that’s not what you wanted to do. Many people have already benefited from these contracts since they were introduced in 2015 — and many more people will likely enjoy the benefits of income drawdown going forward.

However, just as with every aspect of life and financial planning, you need to consider both the pros and cons of drawing down your pension to make an informed decision about whether it’s right for you.

How Does Income Drawdown Work?

Once you hit 55 — unless you can retire early, perhaps because you qualify for an ill health pension or have a protected scheme retirement age for instance — you get access to your money purchase retirement savings and are allowed to draw down your pension.

Pension income drawdown effectively lets you treat your pension pot like a bank account, offering the ability to fund your retirement by:

Leaving your pension savings invested to generate an income to draw from
Withdrawing lump sums as required
Any combination or the above.

Before you start drawing down your pension, you’re usually entitled to take up to 25% of your pot as a tax-free lump sum, known in the business as a pension commencement lump sum (PCLS).

You don’t have to take the entire 25% upfront, nor do you have to move your entire pension to drawdown at once – you can do so gradually, spreading out your drawdown pension benefits over time.

What Are the Advantages of Income Drawdown?

Access to tax-free pension cash
Either immediately upfront or in tranches as you draw down your pension
Flexibility
Vary your drawdown income up and down in any given tax year to help control the amount of tax you pay
Opportunity for growth
As your pension stays invested after retirement, it has the chance to continue growing
Investment control
Depending on your provider, you’ll likely have access to a wide range of investment options
Tax-free investment growth
All funds that remain invested in a pension or a drawdown fund retain tax-free investment return
Favourable inheritance rules
Pension drawdown allows you to pass on any funds still invested free from inheritance tax, which is often easier than passing down annuity income
No need to lock in an annuity at today’s low rates
Although you can still buy one later if you want or need to (and using pension drawdown in the meantime may give time for annuity rates to improve).

Pension Drawdown Calculator

When will your income drawdown pension run out? Enter the anticipated size of your pension pot at retirement and follow these easy steps to calculate how long your pension will last.

Total expected pension assets at retirement*

Expected retirement age

Calculate your pension drawdown based on

Your desired monthly pre-tax income
Years you want your pension to last

In retirement, I will require a monthly pre-tax income of*

Date of Birth

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Disadvantages to Pension Drawdown

It’s important to realise that, as with any part of life, there could be some drawbacks to pension drawdown as well as many benefits. That’s why getting expert advice can be so beneficial, as an adviser can help you steer clear of some of the pitfalls you might face, such as taking too much income and running out of money before the end of your life.

Your drawdown fund could run out
If you take too much money or your investments underperform you could run out of cash (using the above Pension Drawdown Calculator can help address this risk)
Drawdown income isn’t guaranteed
An annuity provides you with a guaranteed income for the rest of your life; this isn’t the case with drawdown, where the pot is finite
You’ll take on all the investment risk
Getting a pensions expert to build you a balanced drawdown portfolio suited to your needs and risk appetite could help reduce the chance your investments will perform poorly, but ultimately you’re still invested in and at the mercy of markets
Potential to overpay tax
It’s easy to get in a muddle with drawdown when taking income from various different sources and you could be pushed into a higher tax bracket than necessary. A financial professional can help you manage your drawdown income to ensure you don’t overpay tax on pension withdrawals
Beware the pension lifetime allowance
Even if your pension is below the lifetime allowance when you retired, excellent investment performance could push you above your cap by the time you’re assessed for the lifetime allowance at age 75
Fees and charges
Depending on your pension provider, there will likely be more fees and charges for pension drawdown than for an annuity
Very small pension pots aren’t well-suited to income drawdown
The risk of these running dry is far higher.

Getting Expert Pension Drawdown Advice

An expert pensions adviser can help you weigh up the benefits of pension drawdown and any potential drawbacks you might face if you choose to fund your retirement this way.

Although income drawdown isn’t the best pension option for everyone, in many cases getting professional advice can help cut some of the downsides that can arise if you opt for drawdown.

An adviser can be particularly valuable when it comes to helping you construct a balanced drawdown portfolio to boost the resilience of your pension investments against market downturns, as well as managing your pension withdrawals to ensure you’re not taking too much cash.

Your Financial Plan: Build A Better Future

A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.

Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey

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