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        Updated: April 16, 2024

        A Guide to Pension Drawdown

        Want to find out more about pension drawdown and whether it’s right for you? Our comprehensive guide explains all you need to know

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        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions Ask us a question and we'll get the best expert to help.

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        If you need to take money out of your pension because you’re approaching retirement, you may want to consider pension drawdown.

        The rules around pension drawdown are quite complex, so it’s worth taking time to fully understand them if you’re considering this option.

        In this guide, we look at pension drawdown in detail, explaining what it is, how it works, the pros and cons, and why it’s always worth consulting an advisor before going down this route.

        Read on for more information or jump to the section that’s relevant to you via the links below…

        What is pension drawdown?

        Pension drawdown, or income drawdown, allows you to access the money in your pension when you retire as and when you need it while leaving the rest of your pot invested.

        It’s an alternative to using all the money in your pension to purchase an annuity, a type of financial product that pays you a guaranteed income for life.

        Up until the pension freedom rules were introduced in April 2015, the only option for retirees was to buy an annuity (however, these rules primarily affected defined contribution schemes). The new rules gave savers greater flexibility and access to their pension funds.

        Speak to an expert today

        Rules and regulations

        You can only access your money using pension drawdown if you have reached minimum pension age (this is currently 55 although this is increasing to age 57 in April 2028) and have a defined contribution pension (also known as a money purchase pension).

        You can’t access your money in this way if you have a defined benefit or final salary pension scheme. If you have this type of pension and want to take a flexible income, you’d have to transfer your funds to a defined contribution scheme. You should always consult an advisor before doing this as, in most cases, savers will be better off staying in their defined benefit scheme. If your pot is valued at £30,000 or more, you’re legally obliged to seek advice if you’re considering a transfer.

        Under pension drawdown rules, there’s no limit to the amount you can withdraw from your pot at any one time. However, you should bear in mind that you could be drawing down from your pension for many years so you need to plan carefully to avoid running out of money.

        You can withdraw 25% of your pension pot tax free and the remaining 75% is taxed as income.

        Step-by-step guide to accessing pension drawdown

        These are the three steps you should take if you think pension drawdown is right for you:

        Read up on the different types of drawdown

        Since 2015 and the introduction of the pension freedom rules, all new income drawdown pensions have been flexi-access arrangements. With flexi-access drawdown, you can withdraw as much as you like from your pension, whenever suits you.

        There are also capped drawdown pensions, however, these are no longer available. If you have an existing one, you can continue to use it or transfer your pot to another provider.

        With capped drawdown, there’s a limit – or a cap – on the amount you can withdraw from your pension each year. The limit is 150% of the amount you would have received a year if you’d bought a lifetime annuity. This is calculated using the Government Actuary Department (GAD) rate.

        Request an up-to-date pension statement

        Your provider will be able to provide you with an up-to-date statement showing how much you have in your pension and how your investments are performing.

        It will also give you a projected retirement income, which will help you work out how much income you can take out of your pension and how frequently.

        Speak to a pensions advisor

        A regulated pension advisor is best placed to advise you on whether pension drawdown is the right choice for you. They’ll start by carrying out a thorough review of your pensions to determine if your investments are performing as well as they could be. The review will also check that your current pension suits your attitude to risk and whether you’re on track to meet your financial goals.

        If, after the review, they believe you’re a suitable candidate for pension drawdown, they’ll be able to research the whole of the market to find the best provider for your circumstances.

        Think you’d benefit from a pensions review? Make an enquiry and we’ll match you with one of the experienced advisors in our network.

        Advantages and disadvantages

        There are both advantages and disadvantages to pension drawdown, and it’s important to weigh them all up before making any decisions.

        Advantages:

        • Flexibility: you have complete control over how much income you withdraw and when you withdraw it. You can also vary the amount you take out depending on your needs and circumstances, and enhance tax-efficiency of your income by ensuring you remain within a selected tax-band.
        • Your pension remains invested: you have the opportunity to keep growing your pot and potentially generate a higher income than you would have with an annuity. However, you could also lose money if your investments perform badly.
        • You can pass your pot on when you die: any unused funds in your pension can be passed on to your beneficiaries. In comparison, an annuity does not form part of your estate when you die and most policies don’t pay out to loved ones when you die.
        • Could provide higher income than an annuity: this means you could be better off than if you chose the alternative, but keep in mind that it is not guaranteed.

        Disadvantages:

        • You may run out of money: unlike with an annuity, your income is not guaranteed and you could potentially run out of money in retirement, particularly if you live longer than expected or you withdraw too much in the early years
        • Your pot could fall in value: depending on the performance of your underlying investments, your pension pot could decrease in value, which means you may have to reduce the amount of income you take or encash funds in an unfavourable market.
        • Your pension will need to be monitored: either you or your advisor will need to continually monitor your investments, which takes time and could come with fees.
        • Can affect your eligibility for benefits: Any means-tested benefits could be impacted depending on how much income you take from your pension. Some could be reduced or stopped if you take a significant lump sum from your pension pot.

        Alternatives to consider

        If you don’t think pension drawdown is right for you, there are other options you can consider.

        UFPLS, or Uncrystallised Funds Pension Lump Sum (UFPLS), is a way of taking a lump sum from your pension pot if you haven’t already accessed your pension in any other way. Each time you make a withdrawal, the first 25% is tax free and the remaining 75% is taxed as income.

        This could be a good option if you have a small pension pot or you haven’t decided what you want to do with your pot in the long term. It can also be a good option if you don’t require a regular income from your pension, and require a certain amount of capital to fund a one-off expense during your retirement.

        The suitability of UFPLS depends on your personal circumstances and we would highly recommend speaking to an expert pensions advisor regarding this option.

        If you want more certainty, you could use part or all of your pension pot to buy an annuity. This pays out a regular retirement income either for life (Lifetime Annuity) or for a set period.

        The amount you will get will depend on various factors including: the size of your pot, annuity rates, your health, your age, and the type of annuity you buy.

        From the age of 55, you are able to withdraw all the money in your pension pot in one lump sum. However, you will face a significant tax bill if you do this. In addition, not all providers offer this option and those that do typically charge hefty fees.

        Get matched with a pension drawdown specialist

        The purpose of your pension is to provide you with a nest egg for retirement, so any decisions you make about accessing it need to be carefully thought through and all options should be considered. A regulated pension advisor can assess your circumstances and advise you on the best course of action. They can also suggest which providers would work best for you.

        We have advisors in our network with years’ of experience helping people with pension drawdown.

        Give us a call on 0808 189 0463 or make an enquiry for a free initial chat.

        Speak to an expert today

        FAQs

        You’re only legally obliged to seek advice from a regulated advisor if you’re considering transferring your defined benefit pension to a defined contribution scheme to access income, and your pot is worth £30,000 or more.

        However, it is strongly recommended that all savers seek advice for pension drawdown as an advisor will be able to suggest the most suitable fund, help you set it up and monitor your investments for you.

        They can also advise you on how much income you should be taking to cover your retirement expenditure needs while remaining tax-efficient.

        You can withdraw 25% of your pot as a lump sum tax free. Any other money taken from your pension using income drawdown will be taxed as income, so it’s worth bearing in mind that larger income payments from your pension pot could push you into a higher income tax bracket.

        You may have to pay a further tax charge if the value of your pension savings when you access the pot is over £1,073,100, the pension lifetime allowance at the time of writing (November 2022).

        There are some nuances to this position, however. For a full explanation on this and how it could affect you and your pension fund it is best to speak with an experienced advisor.

        No, not all do. If your provider does not provide the facility, you can switch to another provider, but you should check for exit charges.

        It can take between four and five weeks for your provider to release your drawdown funds from the date that they receive your request, although this timescale can vary.

        Ask a quick question

        We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions Ask us a question and we'll get the best expert to help.

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        Tony Stevens

        Tony Stevens

        Finance Expert

        About the author

        Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

        Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

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