So, you’re considering drawing down from your pension pot, but you aren’t sure how much you can (and should!) take? It’s important to understand the rules around pension drawdown as well as the potential implications that taking money from your pension can have on your retirement plans and future wealth.
So if you’re wondering “how much can I drawdown from my pension pot?”, stay tuned, our pension specialist and independent financial advisor Simon Garber explains:
The rules around pension drawdown allow you to take as much or as little as you want from your pension as often as you want. The amount you can drawdown from your pension is uncapped. However, there may be tax implications to consider as well as the impact on your long-term finances.
Beyond the tax implications, the frequency with which you withdraw money from your pension and the amount you take may impact your future wealth, so it’s important you manage any withdrawals from your pension in line with your retirement goals.
Remember the old adage, just because you can doesn’t mean you should.
It is fundamental to make sure that your drawdowns are in your financial interests; not just for today, but your entire financial future. Before diving into drawdowns, you should take into account:
- Any rules from your current pension provider (such as any additional costs or limits on drawdowns)
- Whether you will have another income alongside your drawdowns (and the tax implications of this)
- If you are comfortable with drawdowns potentially moving you into a higher tax bracket
- How much you plan to drawdown and how often
- Can your pension sustain your level of withdrawals?
How much should I drawdown from my pension pot?
For the odd few who are not reliant on their pension to support them through retirement, they can take as much as they want from their pension without a problem.
However, for the vast majority of our clients, they need their pension to last as long as they do.
Knowing how much you should drawdown from your pension when you don’t know how long you are going to live might seem impossible but there are some simple ways to work out how much you should be withdrawing from your pension:
As a general rule if you want to ensure that your pension pot does not run through your retirement you should aim to draw down no more than 4% of the value of your pension in any one year.
4% is the amount designated as the Safe Withdrawal rate; The rate at which your investment should increase in value in line with your withdrawals, effectively cancelling your withdrawals out and retaining the value of your pension pot over the long run.
It should mean that enough money is left within your pension to keep providing an income for at least 25-30 years.
We find that keeping drawdown levels at 4% also allows for the cost of investments and advice to be covered so they don’t eat away at your investments.
Safe withdrawal rate is not foolproof but it’s a useful tool for planning.
Afterall, a statistic doesn’t take into account the individual; your lifestyle, your plans for retirement or your ongoing commitments.
We therefore strongly recommend that you speak to a Financial Advisor so they can look at your withdrawals and analyse whether you are taking out too much (or even too little!).
They can also help you to create an ongoing plan so that you can enjoy the benefits of a regular drawdown income while protecting yourself from any bumps in the road along the way.
The last thing you want is to run the risk of bleeding your pension dry. It’s there to last you the rest of your life… It should enable a stress-free, joyful retirement, not one shrouded in financial worries and pressures.
For an initial insight into a withdrawal rate that could work for you, enter some details into our Pension Drawdown Calculator. All you have to do is tell our calculator how big your pension pot is, how much you want to take in retirement income every year and how long you’d like to continue doing this. We’ll do the rest.
Further reading: A complete guide to Pension Drawdown
How much can I draw down from my pension without paying tax?
Nobody wants to pay more tax than needed, especially in retirement when your income opportunities may be limited. It’s heartening to know that there are entirely legitimate ways to limit how much tax you pay on your drawdown pension.
Technically you could draw down your entire pension without ever paying tax if you take advantage of your 25% tax-free cash and keep your income within your tax-free allowance amount.
However, since pensions are taxable income, you may find that other income in retirement, such as the state pension, income from a job or other investment, push your income into the taxable threshold.
Additional income can very quickly move you into a higher tax bracket. The amount you could then see disappear right before your eyes is huge.
- Make use of your tax-free cash
You can draw down 25% of your pension tax-free – after this, the remaining 75% is liable to be taxed at your highest amount.
You don’t have to take all of your tax-free cash in one go, so it can be phased and blended with other income to minimise your tax liability.
- Make use of your tax-free allowance
Every year you have a zero rate tax allowance, known as your personal allowance, this is the amount that you can earn up to before you pay tax. If you keep your pension withdrawals and total income below this amount you will not have to pay tax on your pension withdrawals.
The current tax-free allowance for 2022/23 is £12,570 per year. So, if your pension drawdown is your only income – and you aren’t earning anything else – you could withdraw this as a tax-free sum across the span of a year.
You can also blend your tax-free cash with income within your personal allowance to access more of your pension tax-free.
This is something that your Financial Advisor will be able to help you with – because it isn’t a clear cut answer, and there are certain ways to be more efficient when it comes to the tax implications of your drawdowns. For example, while you may choose to take your 25% tax-free allowance one year, you always have the option of utilising your yearly tax-free allowance in later years.
Try our favourite pension tax calculators to see how much tax you might pay on your withdrawals.
How many times can I drawdown from my pension?
In theory, as many times as you like. One of the key benefits of a drawdown pension is that you can take as much as you want, as many times as you want. But – and there is a but – this isn’t always the case.
Some pension providers have a limit on how many drawdowns you can take on an annual basis from your pension pot. If you cross the threshold of drawdowns, this could incur a fee; it’s, therefore, important that you have all the relevant information and restrictions to hand before you go wild with your drawdowns.
On the other hand, many pension providers offer unlimited drawdowns. This means that you could set up monthly drawdowns to provide a regular income and also top up your regular income from your pension pot as and when needed.
Do not forget: once your pension is gone, it’s gone.
You can only drawdown what actually exists in the pot. Be cautious and considered when planning your drawdowns (and to make sure you get it right, enlist the support of a Financial Advisor).
How do I drawdown from my pension?
A pension drawdown isn’t as easy as popping to the bank with your card, or transferring money over through your phone. It’s a lengthier process, which is why you should always have a strategic plan – supported by an expert – behind you to protect your drawdowns.
There are two main ways to drawdown from your pension:
- Set up a regular drawdown with your pension provider which will be automatically paid to you on an agreed date as a monthly income
- Contact either your pension provider or financial advisor to let them know that you want to withdraw a certain amount of your pension pot
While the first option will enable you to have a regular amount of money hitting your bank account on the same day every month, the second can take between two and three weeks to get to you – so keep this in mind when making your request.
You will also need to consider whether or not you want your pension provider or financial advisor to manage the tax on the payments, or if you will do this yourself.
Do I need a financial advisor for my pension?
It’s not a legal requirement to have a financial advisor to access your drawdown pension, however, the research shows you’ll be wealthier in the long run with one and it’s advisable to find an expert who can help you navigate the complexities of retirement and pensions.
The great thing about having a financial advisor to support you throughout your pension journey is that they are able to provide an extra layer of support and industry insights… It should be seen as an investment, rather than a cost.
A financial advisor will look at your drawdowns and tell you if you are taking too much, or could even stand to take a little more. Essentially, they are there to manage your retirement, providing the guidance that will ensure you never find yourself with an empty pension pot.
In addition, they will help you manage your investments (and advise whether they are at the right level of risk for you) and put the plans in place so that your income is sustainable.
So while you do not need a financial advisor for your pension, it is 100% in your financial interests. In fact, the average person with a financial advisor ends up £40,000 richer over a 10 year period. They are there to help you get the most out of your money – both now and far into your future.
Get independent pension drawdown advice.
This is something that – here at 2020 Financial – we are experts in.
We’re here to help you discover what financial freedom means to you. We’ll work with you – as part of a trusted partnership – to map out how we can get you from where you are to where you want to be.
At the helm of the business is Simon Garber, an Independent Financial Advisor and Qualified Pension Transfer Specialist with over 15 years of experience. His advice is high quality, person-centred and tailored to your unique needs and dreams. He can support you with your pensions and retirement planning and is available to set up a pension planning session with you.
Do something that your future self will thank you for.
