Flexible Drawdown Pensions

It used to be that you got to retirement and your primary option was to use your pension pot to buy an annuity, but changes to pensions in 2015 opened up flexible ways to use your pension for the purpose of providing you with an income when the time came.

In this article we take a look at flexible drawdown pensions, how they work, why they might be a good fit for you and how a pensions advisor can help you make the most of your savings.

What is a flexible drawdown pension?

A flexible drawdown pension, sometimes called flexi-access drawdown, flexible retirement income or simply pension drawdown, is a variable way to take money out of your pension pot after reaching minimum pension (this is currently 55 but will be increasing to 57 in April 2028). It is a potential alternative to the more traditional annuities.

How does it work and what are the rules?

When you do decide to access your pension fund, setting up a drawdown facility is fairly straightforward. You may need to switch providers, and you’ll have to make a decision about how to invest your funds, but an advisor can help with this.

You can take an initial tax free lump sum of up to 25%, and then the rest of the fund remains invested and can continue to grow while you take money from it over the course of your retirement. From here you have a range of options available to you when accessing the remaining pension fund for income purposes, such as:

• Partial drawdown (where you can stretch out how and when you take your tax-free lump sum)
• Phased income drawdown (a way to take a regular tax-free amount rather than all at once)
• Taking an annuity (there are lots of different types of annuities, for example, you can do this for both a fixed short-term or for life)

There is no legal limit to how much you can draw down each year, but remember that once it’s gone, it’s gone, so you need to think carefully about how to make sure you’re provided for throughout retirement.

Is it a good idea?

That depends on your circumstances and attitude to risk, and while there are lots of advantages to flexible drawdown pensions, that doesn’t mean they will suit everybody.

The main benefit is flexibility. If you value freedom of choice over security, then pension drawdown is likely to appeal to you more than an annuity, as it gives you far more flexibility when it comes to how much and when you take income out of your pension.

Flexible drawdown pensions also allow you to keep investing after retirement, and for your funds to have the opportunity to continue to grow, giving you the chance to really make the most of your savings even after you start to take an income from them.

The other key benefit of a flexible drawdown pension is that you can pass on your pension after you die – a big advantage over a basic annuity. It is important to note that while there are annuities that allow you to have a guaranteed period, where funds will continue to be paid out on death to a death benefit nominee, this will reduce the amount of income that your annuity will buy compared to a basic annuity.

With a Flexi-Access Drawdown plan, you can nominate a beneficiary or multiple beneficiaries, and the remaining value of your fund will automatically go to them. They can choose to take income from it, or leave it invested. They may have to pay income tax on the death benefits, depending on your age when you die and how they choose to take the money.

What are the potential disadvantages?

The key thing to be aware of is that your money can run out. Pension drawdown isn’t like purchasing an annuity, where you’re buying a guaranteed income for life – you are taking money out of a finite pot and so need to be careful about how you plan to make it last as long as you need it.

It’s also important to remember that, because it remains invested, the value of your pension can potentially go up as well as down. A pensions advisor can help you choose investments that will be more secure and reduce this risk, but there are no guarantees.

Typical charges that apply

This is where it can get complicated, as not all pension providers charge their fees in the same way and this can make it hard to compare costs. For example, some providers may charge a flat annual fee, while others may charge a percentage, based on the value of your fund. A percentage fee might offer better value if your savings are smaller, whereas a larger fund value could be better off with a flat fee structure. There are also some providers that reduce fees depending on how much you have invested with them.

You’ll also need to factor in other one-off and ongoing drawdown pension charges, including drawdown set-up costs, charges to make changes to your withdrawals and trading fees if you are buying and selling stocks and shares. Some providers bundle all fees into one charge, which can be a lot simpler to understand.

Your pensions advisor will be invaluable here as they will be able to accurately calculate costs and benefits across different providers and help you get the best value for money. Get in touch and we can match you, free of charge, with an advisor who can help you.

Which pension providers offer flexible drawdown?

Not all pension providers offer drawdown as an option, and even if your current provider does, it’s still worth shopping around and considering transferring your pension to a different drawdown pension provider if you can get a better deal or a wider range of investment options.

It can be complicated to compare providers, and there will be pros and cons to each, depending on your needs.

• Hargreaves Lansdown for example has a percentage charge, but on a tiered structure, so larger funds pay a smaller percentage. There’s no fee to set up drawdown and you can change your income withdrawals at any time without charge.
• True Potential Investor gives you the option to take payments monthly, quarterly, half yearly or annually. You can transfer a pension from a final salary scheme, defined contribution or a capped drawdown pension.

Which provider you choose will depend on the fee structure, what you need from it in terms of flexibility, and how you want to invest your funds, so it’s always best to get advice from an independent financial advisor before you make a decision.

What are the alternative options at retirement?

If you decide that a flexible pension drawdown isn’t for you and you want something with more security, then your alternative is to use your pension savings to purchase an annuity. This gives you a guaranteed income, either until you die or for a fixed term, depending on what you buy.

The risk with an annuity is that you don’t automatically get to pass on your pension should you die, unless you pay to add this as a feature. You also don’t benefit from the potential continued fund growth as you do with pension drawdown, and you will need to think about whether or not you want to protect your annuity against inflation.

You could also decide to opt for a combination of annuity and pension drawdown, using some of your pension pot to purchase a guaranteed income and leaving some invested to use more flexibly. If you opt for pension drawdown initially, you are free to decide at any point to use some or all of your savings to buy an annuity. Your pensions advisor can talk you through the pros and cons of an annuity versus pension drawdown to help you make the best choice for you.