Is Pension Drawdown a Good Idea?

Advantages of Pension Drawdown

Many welcomed the introduction of flexi-access drawdown because it offered more people far more freedom when it came to how they took their pension pots.

Before 2015, fully flexible drawdown was only available to those with a guaranteed retirement income elsewhere of £12,000 — otherwise, you had to choose capped drawdown, which placed a strict limit on how much you could take from your pension.

Following the pension freedoms this changed and the benefits of pension drawdown were made available to all.

Drawdown Pensions May Offer Investment Growth

A key benefit of flexi-access drawdown is that your retirement savings stay invested even as you’re withdrawing cash from your pension pot. This leaves open the opportunity for investment growth, although it’s important to remember that your fund could go down as well as up in line with market performance.

Still, the alternative — buying an annuity — sees you hand your cash to an insurance company and forfeiting the right to any capital and investment growth from your fund.

Although you receive a guaranteed annuity income for the rest of your life in exchange for your hard-earned savings, annuity rates are currently very low. Plus, you’ll miss out on the potential for any post-retirement growth in your pension investments.

Added Flexibility With Pension Drawdown

Another benefit of pension drawdown is that it offers you huge flexibility in terms of how you withdraw cash from your pension. This works particularly well if you don’t need a regular income and can therefore just dip into your pension here and there as required.

While there is likely to be tax to pay on any income drawdown withdrawals, speaking to an adviser and planning for these can help minimise your tax liability.

Generally, income drawdown is better than an annuity when it comes to tax-efficiency. This might be valuable to you if your income is derived from multiple sources (e.g. other pensions, savings, non-pension investments or buy-to-let properties etc.).

While an annuity pays you a fixed amount, which is then added to your total earnings that tax year, pension income drawdown lets you increase and decrease your income in any given tax year as required.

In years where it appears your earnings may push you up a tax bracket, you can withdraw little or nothing from your flexi-access drawdown fund as a way of staying below the threshold.

Can I Buy an Annuity With My Drawdown Fund?

Absolutely. If you decide later in life that you’d rather opt for an annuity — perhaps because you’re older and your health has deteriorated, meaning you can get a better deal with an enhanced annuity and / or need a regular income to pay for care — then you can.

You could even buy an annuity with some of your pension savings early on and put the rest into pension drawdown. That way, you could benefit from having a stable income from the annuity but also the additional flexibility and investment growth provided by income drawdown.

Passing On Your Pension Tax Efficiently

Another benefit of income drawdown is that it offers far more freedom when it comes to your family inheriting your pension.

If you want to pass on your pension to your love ones, an annuity offers only limited options. Generally, beneficiaries of an annuity income can be your spouse — who’ll most likely get a reduced survivor’s pension — or dependent children, but only up until the age of around 23. There are few other options.

With income drawdown, providing the funds remain invested in your pension (i.e. not withdrawn and sitting in a bank account, for example), there’s no inheritance tax due on your pension savings.

Your beneficiaries also won’t have to pay income tax on the pension fund they receive if you die before you’re 75. If you die after this age they’ll have to pay income tax on the fund, however, at their highest marginal rate when they start to draw on it.

Disadvantages of Drawdown

Could it be wrong for you? While pension drawdown has its advantages, it won’t be right for everyone. Income drawdown might not be right for:

• Those with smaller pension pots — these will likely be depleted too fast with income drawdown
• Those worried their pension might run out — tools such as our Pension Drawdown Calculator can give you an idea of how long your pension will last, but if you take too much cash out or your investments don’t perform as you hoped then your pension fund could run dry
• Those who don’t want to take investment risk — if you don’t feel comfortable managing your own investments or are concerned with the fact that your fund could fall as well as rise, income drawdown is unlikely to be for you
• Those who need a regular, secure income
• Those who don’t want to pay ongoing charges to access their pension — because pension drawdown keeps your pension pot invested, there are ongoing fees and management charges, including potentially fees on withdrawals, that aren’t present with an annuity.

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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