Pension drawdown is a popular method of accessing your pension savings when you reach retirement age. With drawdown, you have flexibility and control over your pension income, allowing you to choose how much money you withdraw and when, while keeping any remaining funds invested to allow them the opportunity for further growth.
But how do you know which option is right for you?
At My Pension Expert, our service is tailored to your specific needs and circumstances. We provide honest, transparent advice with no obligation to proceed, so you can make informed decisions about your pension.
How does pension drawdown work?
First, check your eligibility
In most cases, you can start taking benefits from your workplace or personal pension from age 55 (or 57 from April 2028). At this point, you might consider taking an income or your tax-free cash.
If that sounds like you, now is the time to understand how drawdown could help you to unlock the potential hidden in your hard-earned savings.
So, what is a drawdown pension?
With drawdown, your pension savings remain invested, but you can withdraw cash in whatever way best suits your objectives. This may be a one-off cash withdrawal or a regular income. Unlike other retirement options, such as an annuity, you can change your income at any time. So, you’re not tied to the level of income you choose when you set up your pension drawdown.
Remember, you can also take 25% of your pot tax-free, and your Independent Financial Adviser (IFA) can help you decide whether to take it all upfront, take a portion of it, or leave it invested for now and choose to have 25% tax-free on each withdrawal.
Because any remaining funds stay invested, they could continue to increase in value throughout your retirement. However, this depends on market conditions - it’s vital to remember that all investments carry risk, meaning the value can rise and fall, and past performance doesn’t reflect future performance.
Before deciding whether drawdown is right for you, it's important to speak to an IFA to understand the level of risk you are comfortable taking in your retirement strategy. From there, an IFA can recommend a scheme that matches your needs.
Is drawdown better than an annuity?
Drawdown and annuities serve different purposes; we wouldn’t say either option is better than the other.
What works for you depends entirely on your circumstances. You should consider things like how much you usually spend each month, your pension fund value, the type of lifestyle you want in retirement, any other income you may have access to, and your tax position before deciding which option might work best for you.
We’d recommend speaking with one of our advisers to discuss which options could help you reach your retirement goals.
- You can make changes to your plan as and when required, like changing the level of income you receive or the frequency of payments.
- Any funds you don’t withdraw remain invested, so they have the potential to continue growing over time.
- If your circumstances change and you no longer feel comfortable with the level of risk your investments carry, you can change where your funds are invested.
- At any point, you may decide to switch to an annuity, perhaps for a more secure income or because you become eligible for an enhanced annuity. With drawdown, there’s nothing stopping you!
- Passing on a drawdown pension is flexible - your beneficiaries may take it as a lump sum, set up an annuity, or leave it invested.
Choosing a flexible-access drawdown plan
Our team of expert advisers are here to guide you through the entire process, from understanding your pension options to creating a personalised drawdown plan that meets your financial goals and lifestyle needs, even if they change going forwards.
How to set up your drawdown income
It's important to note that setting up a drawdown can be complex, and there are risks involved in keeping your pension savings invested. It's a good idea to seek professional financial advice to help you make informed decisions and understand how much risk you are comfortable taking.
At My Pension Expert, we advise you on which option we believe to be most suitable for you and explain any charges that would apply. We also manage the transfer process and can even help you stay informed of your investment performance moving forwards, with the help of our ongoing advice service.
Understanding drawdown income options
Drawdown gives you the flexibility to choose how much income to take from your plan and when. Depending on your circumstances, including other sources of income and tax status, some income options may work better for you than others.
Below is a summary of the income options available in drawdown. Your My Pension Expert IFA will help you understand the potential benefits and drawbacks for each and make their recommendation as part of your advice appointment and your annual financial health checks. 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 retirement income.
Your Income Options
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.
Draw funds from your capital
This option 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.
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.
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.
There are many things to consider when at retirement, and choosing how to draw benefits from your pension is an important decision. Our team of IFAs can help you to better understand the options and offer a recommendation tailored to your needs.
Talk to a member of our team to take your first step on your retirement journey. With no obligation, we’re here to help you unlock your pension potential.