Schedule a free discovery call with a Pension Specialist
Do you want flexible access to your pension from age 55? If the answer is a resounding ‘YES!’, then pension drawdown could be the route for you.
Pension drawdown enables you to use your pension pot to enjoy a regular retirement income, while allowing your investment to keep on growing in the background. However, in order to reap the benefits of investment growth, you need a solid retirement plan and investment strategy. Luckily, that’s where we step in.
Talk to a Pension Specialist
No commitment, no hard sales, just a quick chat with one of our pension advisors to see if we can help
What does pension drawdown mean?
Pension drawdown is a flexible way of accessing your defined contribution pension from age 55. It allows you access your pension in a number ways including:
- taking a regular income in retirement, or
- taking one-off cash lump sums from your pension over time
Wth flexi-access drawdown you can also blend tax-free cash with taxable withdrawals and keep the rest of your pension invested whilst you're taking an income. And, you can still work and take your pension at the same time.
Is pension drawdown a good idea?
Pension drawdown isn’t for everyone; it’s crucial that you have the plans in place and the know-how to ensure your money actually lasts.
Because once it’s gone, it’s gone. Unlike an annuity or a Defined Benefit Pension, a drawdown pension is not guaranteed for life. So, you will need to manage your money meticulously to make sure it doesn’t disappear.
However, get it right and pension drawdown has some pretty impressive benefits:
- It’s flexible - you can take more when you need it and less when you don’t
- It allows you to manage your withdrawals tax-efficiently
- You may be able to defer paying Life Allowance tax until you are 75
- You can pass any leftover money onto beneficiaries, fully free of inheritance tax
When planning for pension drawdown, you will want to consider the impact on your income if you:
- Live longer than you have planned for
- Withdraw too much money in the early years of retirement
- Invest in funds that don’t perform as well as you had anticipated
A Financial Advisor can help you navigate these forks in the road and will build it into your overall investment strategy.
What is a safe drawdown rate?
As a general rule, taking 4% of your pension pot per year is considered a safe withdrawal rate, but this depends on a number of key factors.
When we refer to ‘safe withdrawal rates’, this is the amount that you can comfortably take out of your pension every year, while still protecting a big enough portion of your pension pot so that it can grow at a similar rate to your withdrawals.
Essentially, the aim is to stop your fund from depleting too quickly; this could ultimately lead to you running out of money during your retirement and finding yourself in a tricky, far from ideal situation.
Although 4% is a good rate to keep in mind, what a safe drawdown rate looks like for you will depend entirely on your investment risk tolerance, how your personal investments perform over time, how long you need your money to last and what your financial aspirations are.
Any withdrawals need to be aligned with your investment returns. This is an area our team of experts can help you figure out; it’s an area of retirement planning where we excel.
Pension drawdown advice
The key to getting the most out of pension drawdown is careful, precise management. Afterall, the last thing you want when you’re trying to revel in your golden years is to wake up one day to an empty pension pot.
A few of the most common risks of pension drawdown include:
- Taking too much out of your pension pot on too frequent a basis
- Withdrawing too much as a lump sum early on in your retirement
- Not managing your money tax-efficiently
- An appetite for risk that sits on either end of the spectrum… too much or too little!
Rest assured, with the right support and strategy, these risks can be easily avoided.
Find out more about how to manage the risk levels of your pension drawdown
Our pension drawdown specialists know everything there is to know about getting the most out of your pension.
Book a free consultation - let’s chat about your future wealth.
Drawdown pension benefits
As with most financial decisions, there can be pros and cons to combining your pensions. As long as you’re not giving up valuable benefits it can make a lot of sense to manage your pensions in one place, especially if you’re moving them to a Self Invested Personal Pension (SIPP).
Some of the benefits include:
Greater investment choice and control
Flexibility to access drawdown
Potential to save on fees
Potential to access better-performing investment fund
Leaving an Inheritance*
*It’s worth noting that Defined Contribution Pensions and SIPPs can usually be passed on free of Inheritance tax to named beneficiaries. The fewer pension pots you have, the fewer pension scheme trustees you’ll need to keep updated of address changes, beneficiary changes and it will be easier to manage.
Find out more about the benefits and risks of transferring multiple pensions.
Drawdown pension providers
As Independent Financial Advisers, you can trust that our advice is 100% impartial and built around your unique needs. That means we are able to suggest the best drawdown pension provider - based on your circumstances and goals - and transfer your pension to your new drawdown pension provider if needed.
We will always discuss different options with you, ensuring you have all the information you need to make the best decision for your financial future.
Combining pension pots for drawdown.
It isn’t uncommon to have multiple pension pots; especially if you have worked in a variety of different settings, all with their own workplace pensions.
If appropriate, we can provide you with specialist advice on how to combine your different pension pots. However, it’s important to note that some pensions have valuable benefits that can be lost if you move them. But don’t worry; we will look at your different pots and find the most beneficial solution for you.
Frequently Asked Questions
While it is possible to draw everything out of your pension, it isn’t a good idea. You will end up paying tax (at the highest rate) on 75% of your pension, meaning you stand to lose a substantial amount of your hard-earned investment.
You can, however, take out 25% as a tax-free lump sum and then re-invest the rest into funds designed to provide you with a regular taxable income. You set the income you want, although this might be adjusted periodically depending on the performance of your investments or changes to your lifestyle.
Pensions are taxable at your marginal rate of income tax, which means that you can use your personal tax allowance every year to access your pension without paying tax on it.
You can also access 25% of your pension pot tax-free; this means you can blend tax-free cash from your pension along with using your personal tax-allowance to access even more of your pension tax-free.
A pension is a tax-efficient savings vehicle - one of the best around - but once you take your money out of your pension you start incurring tax on your withdrawals.
If you don’t need to access your pension, then you’re better to leave it invested and take it as monthly income (rather than taking it out as a lump sum).
If you do decide to take your pension as a lump sum:
- The first 25% is tax free but you’ll pay income tax on the rest at your highest rate
- You could be liable for other taxes if you reinvest your money elsewhere
- You could become liable for Inheritance tax at 40%
Pros and cons of pension drawdown include:
- It’s flexible - you can take more when you need it and less when you don’t
- You can manage your withdrawals tax-efficiently
- You may be able to defer paying Lifetime Allowance tax until you are 75
- You can pass any left-over money onto beneficiaries free of Inheritance tax
- As long as it’s regulated by the FCA, it’s protected by the Financial Services Compensation Scheme
- You can convert it to an annuity at any point in the future if you decide to.
- However, you need to manage your money carefully to make sure you don’t run out
- Once it’s gone, it’s gone. It’s not guaranteed for life like an annuity or Defined Benefit Pension
Pros and cons of annuity include:
- It’s a guaranteed income for life: it will continue to pay out, even if you live to 120
- As long as it’s regulated by the FCA, it’s protected by the Financial Services Compensation Scheme.
- It can be adjusted for inflation (although not all annuity policies offer this)
- If you have life-limiting health issues it is possible to be offered a higher income due to your lowered life expectancy
- An annuity generally dies with you, and cannot be passed on to loved ones if you die young (although there are exceptions to this, they are rare and expensive).
- It offers a fixed income every month, so you can’t manage your income for tax-purposes or defer your Lifetime Allowance tax payment
A considerable benefit of drawdown pension is that it allows you to pass money on to any named beneficiary/s after you die, totally free of inheritance tax. Depending on how old you are when you die, it could be free of income tax too.
It’s pretty straightforward: you just need to request and submit a ‘nomination of beneficiaries’ form.
If you have several pension providers, you will have to do this with each of them.
Our most popular posts
These are some of our most popular posts. Click below or head over to our blog to see other helpful articles on pensions, retirement and investing.