How Does Pension Drawdown Work?

How Do I Use Pension Drawdown?

For the vast majority of people and pension schemes, you have to be 55 before you can access your pension in any way, including through pension drawdown.

There are a very small number of schemes that allow you early access (check with your pension provider for more on this) before the age of 55, but it’s highly uncommon.

If you’ve been diagnosed as severely / terminally ill and have a shortened life expectancy you may also get access to your pension early, although whether pension drawdown will be right for you in this instance requires careful consideration and a conversation with a qualified adviser.

To start you designate your pension — or part of your pension — into an income drawdown fund. You’ll then be able to keep your savings invested and create your own programme of lump sum and income payments from that fund.

You can treat your drawdown pension as a sort of ‘bank account’ and withdraw lump sums as required, or you can set up a regular payment to help meet your everyday financial needs in retirement. You can also mix these two options.

Whichever option you choose will affect the tax you pay on an income drawdown pension.

What is a UFPLS?

An uncrystallised funds pension lump sum (UFPLS), also known as a FLUMP, is similar to pension drawdown but is distinct in that it’s only available on uncrystallised pension funds (i.e. those not already in drawdown).

Instead, you withdraw lump sums direct from your pension pot as required. Each time you do, 25% of your withdrawal will be tax-free. Every 25% tax-free lump sum has to come with an accompanying 75% of taxable cash. So if you want £10,000 tax-free using a UFPLS, you’d also have to take a non-negotiable £30,000 of taxable cash.

UFPLS is slightly less complicated that income drawdown because you don’t have to find a drawdown provider and decide where you want to invest your drawdown fund.

However, not every pension provider will allow you to withdraw FLUMPs straight from your pension pot and there may be charges each time you do so.

Setting Up My Drawdown Pension

Detailed below are a very simplified set of steps designed as a guideline if you’re considering flexi-access drawdown for your retirement income. The actual process of pension drawdown requires a great deal of consideration and financial planning in areas such as tax and longevity risk. That’s why we would always suggest your first step should be contacting a qualified pensions expert such as one of our experts here at Drewberry.

• Contact a pension drawdown expert
  They can help you decide whether it’s right for you and put together a personalised drawdown programme
• Find a provider that permits flexi-access drawdown
  Your current pension might not offer such flexibility, and even if it does an experienced adviser might be able to find you a better option
• Choose your drawdown fund or funds
  There are a wide range of investment options available to you, all of which are best discussed with your adviser
• Decide if you want to take up to your 25% tax-free cash lump sum
  Taking a lump sum could affect how your drawdown pension benefits are taxed later on
• Create your own programme of lump sum / income payments
  This can be tailored to suit your own personal needs, although you will always have to consider the tax implications of your withdrawal and the overall size of your pension pot to ensure it doesn’t run out too soon.

The Income Drawdown Calculator below can help you work out how long your drawdown pension might last given its size and the income you want in retirement, but it’s no substitute for speaking to an expert.

Can I Use Flexi-Access Drawdown?

Available to most people with defined contribution pensions, pension drawdown allows you to leave your pension pot invested and take an income as necessary.

Who Can’t Use Pension Income Drawdown?

Not every pension provider will allow you to use income drawdown – you may have to transfer pension schemes to find one that does.

Also, different providers will offer different drawdown plans and investment options, so even if your pension provider does offer flexi-access drawdown it makes sense to look across the market to ensure you’re getting the best deal. Otherwise, you could incur unnecessary pension drawdown costs.

Our advisers are qualified to help you shop around for an income drawdown provider and are more than happy to provide you with assistance in this area.

Some older personal pensions are highly unlikely to allow you to use pension drawdown, including:

• Section 226 retirement annuity contracts (RAC) or section 32 buy-out plans
• Defined contribution occupational schemes
• Additional voluntary contribution (AVC) and free-standing AVC plans
• Many older personal pension contracts including stakeholder or group personal pension (GPP) arrangements.

How Much Can I Take from My Drawdown Pension?

There is no limit to how much you can withdraw from new flexi-access drawdown plans, although withdrawals beyond the initial 25% of your pot will have tax implications. You could pay a great deal of tax if you access your pension all at once, so it’s not generally advisable to do so.

Still, with drawdown you’re free to take as much or as little as you like each year, which can be incredibly useful to help balance out your income to ensure it’s as tax-efficient as possible.

However, remember that your income drawdown pension is a finite pot. If you take too much out, your investments underperform or you simply live longer than you were expecting, then your pension could run out.

How Long Will My Pension Last?

Tools such as our Pension Income Drawdown Calculator can help you understand how much you can withdraw each month to help mitigate the risk that your pension could run out early. They can also show you how long your pension will last if you take a certain monthly income.

For a truly accurate picture of your financial future as part of our financial planning service we use sophisticated modelling software to create your living breathing financial plan – read more

How is Pension Income Drawdown Taxed?

The tax implications surrounding flexi-access drawdown are the most complicated part of using this method to take your pension.

That’s why we’d always recommend you seek the help of a financial adviser who specialises in pension drawdown to navigate this area and ensure you don’t pay more tax than required on your pension.

How Much Tax Will I Pay on My Drawdown Pension?

Generally speaking, you can take up to 25% of your pension as a tax-free cash lump sum.

The remaining 75% of your pension is taxable at your highest marginal rate, regardless of whether you take a taxable income or withdraw taxable lump sums.

If you draw down a sum from your pension pot that pushes you up into a higher tax bracket, you’ll be taxed at a higher rate on the income that’s exceeded the lower threshold for that tax band.

Phased Pension Drawdown

If you withdraw your entire pension in one go, then you could face a hefty tax bill on the taxable 75% of your pot.

For those with large pension pots, withdrawing your pension all at once could put you in the higher (40%) or even additional (45%) tax bands.

As such, many people with larger pensions opt for gradual income drawdown, which is also known as phased income drawdown.

Here you shift your pension into drawdown slowly over several tax years to avoid a big tax hit on the taxable 75% of your pot. Each time you designate money from your pension as in drawdown, the first 25% of the sum is tax-free.

Ultimately, how much you’ll be taxed on your income drawdown pension depends on how much you take out of it and the way you take it. That’s why it’s important to create a personalised drawdown programme with an expert adviser who can help keep your tax liability on your pension income low.

This will involve putting together a financial plan for your retirement that will look at your finances in the round, not just your pensions, to see how much is affordable and tax-efficient to withdraw from your pension from year-to-year.

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

Why Speak to Us…

We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as planning our finances. Below are just a few reasons why it makes sense to let us help.

• See your financial future
  We use sophisticated financial modelling technology to visually show you your financial future. A living financial plan where you can clearly see what you can achieve depending on the decisions you make – read more
• Achieve the retirement you deserve
  Can afford that dream round-the-world trip? Can you help your children onto the property ladder? We’ll model your goals and build your financial plan to help you achieve them.
• Our expertise saves you time and provides peace of mind
  Organising your pensions, investing your assets, managing risk and making the most of your tax allowances is all taken care of as part of your financial plan.
• We’ve got bargaining power on our side
  This allows us to negotiate better rates for you than dealing with providers yourself.
• You’ll speak to a dedicated expert from start to finish
  You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
• Benefit from our 5-star service
  We pride ourselves on providing a 5-star service, as can be seen from our 2386 and growing independent client reviews rating us at 4.92 / 5.
• Gain the protection of regulated advice
  You are protected. Where we provide a regulated advice service we are responsible for the decisions we help you make. Doing it yourself or going direct to a provider won’t provide this protection, so you won’t benefit from these securities.