Are you approaching retirement age and wondering how to access your pension savings? A flexible-access drawdown, often known simply as ‘drawdown’, could be the answer.
What is drawdown?
Drawdown is a popular method of accessing your pension savings that offers flexibility and control over your income. It allows you to keep your pension savings invested while withdrawing cash as and when you need it.
Depending on your objectives, you could take a lump sum or set up regular withdrawals, adjusting your income whenever necessary. So, unlike fixed options like annuities, drawdown offers flexibility to adapt to your changing needs.
See it in action
How do you know if drawdown is right for you?
At My Pension Expert, we take the time to understand your circumstances so we can provide personalised advice that puts you in the best possible position at retirement. With no obligation, our pension experts are here to make sure you have confidence in the decisions you make regarding your pension.
Is drawdown better than an annuity?
Both drawdown and annuities have their benefits; we wouldn’t say either option is better than the other.
What works for you depends entirely on your circumstances. Factors like your spending habits, pension value, desired lifestyle, and tax situation will influence what’s the best choice for you.
We’d recommend speaking with one of our advisers to discuss which options could help you reach your retirement goals.
- Flexibility: Adjust your plan as needed. Change your income level or frequency, switch up your investment strategy, or purchase an annuity later.
- Potential Growth: Keep funds invested for potential growth throughout your plan.
- Legacy Planning: Passing on a drawdown pension is flexible – your beneficiaries may take it as a lump sum, set up an annuity, or leave it invested.
- Investment Risk: As with all investments, capital invested in drawdown is at risk. Your IFA will work with you to find an appropriate portfolio for your goals and circumstances.
- Tax Implications: Income withdrawals are subject to tax, affecting your overall financial planning.
- Reviewing your options: An annuity could be a better solution if you’d prefer a guaranteed or fixed income without investment risk.
Steps to set up your drawdown
(Spoiler alert: we can support you with all of it! You can find out more about the ways we help you keep things simple here)
1. Identify your position
You probably have more than one pension pot, so round them all up to get an overview of your total pension fund value and assess any safeguarded benefits you may have. You can find lost pensions with the help of the government’s pension tracing service.
2. Choose a provider
Shop around to find a provider offering the options most suited to your needs, as features, charges, and investment options can differ between plans.
3. Select your investments
Most providers will offer a range of model portfolios, so selecting one that suits your objectives and considers how comfortable you are with risk is vital.
4. Decide your income
Determine the level of income you want to take from your pension savings. It will depend on factors such as your age, investment performance, spending, and the value of your pension pot. It’s important to choose a sustainable income that meets your needs over the long term, although you can alter it at any time.
5. Complete the paperwork
You’ll need to complete an application to set up your drawdown plan. These forms typically request information about your pension savings, retirement plans, and investment preferences.
6. Transfer funds
Once your new provider has confirmed that they have all the information required, they’ll start the transfer. Transfers often take between four and twelve weeks but can take longer. We recommend starting the process as early as possible so that you can access your money when you need it.
7. Monitor investments
Once everything is set up, you should regularly review your investment performance and adjust your income accordingly. If your investments perform well, you may be able to take a higher income in future years. However, if they perform poorly, you may need to reduce your income to avoid running out of money.
With My Pension Expert’s ongoing advice service, we review all of this for you, with annual financial health checks that make sure you stay on track.
8. Understand taxation
Any income you take from your pension savings with drawdown will be subject to income tax. The amount of tax you pay will depend on your total income and tax status.
At My Pension Expert, we advise you on which option is most suitable for your unique circumstances. We’ll make sure you clearly understand any risks and charges that apply so that you can make an informed decision.
We also manage the transfer process, with regular updates from our client support team, and can even help you manage and adapt your drawdown plan moving forward with the help of our ongoing advice service. So, with My Pension Expert, you can future-proof your retirement strategy.
Understanding drawdown income options
As we’ve indicated, drawdown gives you income flexibility. The below table explains some of the income options available – speak to our team to find out more about how they could impact your future retirement finances and get a recommendation tailored to your needs.
Don’t forget, aside from choosing an income option that works for you, it’s also important to consider the level of income, as this can affect the sustainability of your pension fund.
Tax-free cash
You can take a lump sum of up to 25% of your pension fund value in one go as tax-free cash. Or, you could choose to have 25% tax-free on each withdrawal. Your adviser will help you to understand how this could affect you.
Use your investment growth
When using investment growth, you only draw an income for the amount your fund has grown. So, say you have a fund value of £50,000 which increases by 5% over the year. In this scenario, you would withdraw this 5%, or £2,500, as income.
Using investment growth for your income removes the risk of your fund running out too early. However, it does mean that your income would be variable and dependent on growth.
Draw funds from capital
This lets you take money from your fund as needed. Your fund manager may dip into cash reserves or sell some of the investments that make up your portfolio, making sure it stays balanced to meet your requirements.
This lets you take a higher income, but you may run out of funds sooner. When choosing how much income to take, you should consider how long you need the fund to last so you don’t run out of money.
Don’t take any regular income
You may choose not to take a regular income, leaving the whole fund invested to maximise your potential investment growth.
Drawdown’s flexibility allows you to draw money from the fund as required, such as a one-off withdrawal, or switch on regular income payments later. It’s wise to discuss any changes to your income with an adviser, who will help you to understand how this may affect how long your funds will last.
Next steps
Talk to a member of our team today to begin your retirement journey with confidence. There’s no obligation, just personalised advice to unlock your pension potential.
Want more information but not ready to get in touch? Our drawdown calculator can give you an idea of what a sustainable monthly income could look like for you.