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.
However, making the right decisions can be tricky with so many options available.
At My Pension Expert, our service is tailored to your specific needs and circumstances. We provide honest and 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.
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
You probably have more than one pension pot, so round them all up to get an overview of your total pension fund value. You may also be able to find lost pensions with the help of the government's pension tracing service. It’s important to check for any benefits associated with your existing pension pots, as you may lose these if you transfer to a new plan.
Although your current provider may offer drawdown, you should shop around to find the option most suited to your needs, as features, charges, and investment options can differ between plans.
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 important.
You’ll need to decide on the level of income you want to take from your pension savings. This will depend on factors such as your age, investment performance, spending, and the size of your pension pot. It's important to choose a sustainable income level that meets your needs over the long term, although you can alter your income at any time. Of course, an IFA will be able to help you decide this.
Once you have chosen a provider, you’ll need to complete the paperwork to set up your drawdown. This typically involves providing information about your pension savings, retirement plans, and investment preferences. At My Pension Expert, our dedicated client services team take on as much of the administrative burden as possible, helping you to stress less.
The transfer process begins once you’ve completed the paperwork and your new provider has all the information required. Transferring pension funds takes longer than other switches, such as moving bank accounts. Your current provider needs to prepare your funds for transfer, which can take between four and twelve weeks or, in some cases, even longer.
If you can, we recommend starting the process as early as possible so that you can access your money when you need it. Again, our dedicated team will keep you informed every step of the way so you know exactly where your money is at all times.
It's important to monitor the performance of your investments and adjust your income accordingly. If your investments perform well, you may be able to take a higher income in future years. Alternatively, if they perform poorly, you may need to reduce your income to avoid running out of money.
This is why all My Pension Expert ongoing clients receive regular updates regarding fund performance and are invited to regular pension health checks. These allow you to discuss the progress of your investments and whether any potential changes need to be made to your retirement strategy.
Any income you take from your pension savings with income drawdown will be subject to income tax. The amount of tax you pay will depend on your total income and tax status.
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
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.
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.
Next Steps
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.
Want more information now 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
