What is pension drawdown?

Income or pension drawdown is one of the options you have to take money from your pension.

With this option you can take up to 25% of the money you have in your pension pot as a tax-free lump sum, then reinvest the rest.

Your money stays invested, usually in stock market funds which are chosen to help you have a regular income.

Your investments may grow, and the returns from this investment growth could see your pot continue to increase in value.

However, your there is the possibility that if markets perform badly, your pot could also fall in value.

You set the income that you want to take from your pot, and this can be adjusted depending how your investments perform.

Unlike with a lifetime annuity your income isn’t guaranteed for the rest of your life, so it’s important to manage your investments carefully and you could benefit from the help of a regulated financial advisor.

Is pension drawdown right for me?

Pension drawdown is a complex product but a financial adviser will be able to assess your circumstances and advise whether it’s suitable for you.

It is worth considering if you:

• Want your money to continue to be invested
• Want flexibility and to be able to take sums out when you want, and regularly change the income you receive
• Want to be able to adjust the sums you take according to your annual tax liability

It might not be for you if:

• You want a fixed guaranteed income every year
• You want the safety of knowing you won’t run out of money
• You don’t want any investment risk

There are some things you should think about if you are considering pension drawdown:

• You need to plan carefully how much income you can afford to take out, as there’s a risk you could run out of money if you take too much too early, or if your investments don’t perform as well as expected.
• You need to think about your investing expertise and whether you should have professional help from a regulated financial adviser.
• You or your adviser should regularly review your investments
• There may be charges for taking your money out

What are the drawdown rules?

Any new arrangement for drawdown set up after April 2015 is knows as ‘flexi-access drawdown’.

You can take up to 25% of your pension savings tax-free upfront, and there are no limits to how much income you can withdraw as long as funds allow. For example, you could take it all in one go, take payments monthly or every year, or take lump sums according to when you need them.

After the first 25% tax-free, subsequent withdrawals are subject to current income tax rates at an individual’s marginal rate

For 2020/2021 these are:

0% for the first £12,500 providing you have no other income.

20% on the next £37,500

40% on everything over £50,000

45% on everything above £150,000

What are the alternatives to pension drawdown?

Annuities

When you purchase an annuity you use your savings to buy a guaranteed income for the rest of your life.

Annuities should always be a consideration in the advice process as they offer a guaranteed level of income normally without investment risk and may be suitable in many different situations, an annuity is normally discussed with anyone considering drawdown.

One-off lump sums

You can take regular ad-hoc withdrawals from your pension plan. You can take all of your pension in one go, or in a series of smaller lump sums.

There are advantages to all of the different options for releasing your pension, so it’s best to speak to a regulated financial adviser to get advice based on your individual circumstances.

Contact Amethyst IFA and we will be happy to help.