Blog » Is pension drawdown right for you?

Is pension drawdown right for you?

October 20, 2022
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.

Pension drawdown can provide a great income in your later years. It allows much needed flexibility when you stop working or if you decide to reduce your hours. With the latter you can consider partial retirement. This is because from the age of 55 (or at 57 from 2028) you can access and enjoy the benefits of those savings you originally put aside for your retirement. You can take that income at any time after 55 and the remaining savings in your pension fund continue to be invested. With an extra income coming into your household there is less pressure to depend entirely on your work income. But it’s important to keep in mind that accessing your pension early will leave you worse off in retirement.

An annuity vs pension drawdown

Many people feel that pension drawdown is more flexible than taking out an annuity because you can change the amount you receive as an income and continue investing for the future. The amount you will receive from an annuity will be the same for the rest of your life and some individuals are attracted to this feeling of security. While you can take inflation into account with pension drawdown (by increasing how much and when you drawdown in line with inflation) you can never guarantee how much your remaining investments will make. It is important to remember that past performance is not a reliable indicator of future results. Therefore, there is an element of risk here. You can take out as little or as much as you like but your pension size is dependent upon the performance of your investments.

family alfresco dining | pension drawdown

Be cautious

You need to ensure you do not leave yourself financially short in your retirement or fail to recognise all the benefits which are open to you. In this article we will go through those benefits, what to look out for in order to keep yourself safe, and techniques for getting the most out of your investment. Let’s start at the beginning.

What is pension drawdown?

Pension drawdown is a method of accessing your private pension from the age of 55. This method and various others were made available to individuals in 2015 when the Conservative government introduced the Pension Freedoms Act.

Instead of taking one lump sum from your pension pot you take it as an income for the rest of your life. While it remains a popular option for many, it is important to make sure that releasing funds from your pot will not leave you short in retirement.

Regulated financial advisers

It is therefore highly recommended that you seek the advice of a regulated financial adviser in order to stay safe and make an informed choice. Not all private pensions allow access to your money – let alone via pension drawdown. Your funds need to be a defined contribution pension. This is the most common pension fund whereby the pension money you save throughout your career is invested by your provider. If you do not have a defined contribution pension, a regulated financial adviser can look into transferring your funds to a scheme more suited to your needs. However, in doing so, you could be giving up valuable benefits.

Benefits and obstacles to look out for

  • If you are looking to use pension drawdown you need to know what kind of scheme you have. Pension Freedoms is relatively new so older defined contribution schemes may not allow the access you are looking for.
  • Always be aware of the taxman. Only the first 25% of your pension funds are tax free and any further withdrawal are taxable as income. Also, if you withdraw too much money in any one year you could find yourself falling into a higher tax bracket. Tax treatment depends on your individual circumstances and may be subject to change.
  • Some individuals will continue to work at the age of 55. It is good to know that you can still contribute to your pension even while accessing it. Take these contributions into account when calculating the amount of money you will need for your retirement.
  • Before transferring your pension to one that allows you to access your cash, make sure you are aware of any benefits you would be giving up. Consider provider charges and the benefits included in your new scheme. And always read the small print of your current scheme – some schemes may ask for an exit fee.
  • But it’s important to keep in mind that accessing your pension early will leave you worse off in retirement. Remember that in the 21st century statistics suggest that the average individual will be looking to enjoy around thirty years in retirement.

Our regulated financial advisers here at Pension Access can walk you through the pro’s, cons and options you have so you can make an informed decision.

Mix and Match

Not sure if you want to use the whole of your fund for pension drawdown? Don’t worry, you can mix and match. In other words, you can use some of your money for a lump sum, some for an annuity and some for pension drawdown. In this way you are adding security to your investments and applying flexibility to how your money is used.

To make sure your new plan is doing exactly what you want it to do, make sure you review it regularly. For instance, it is a good idea to check your investments are performing as well as you hoped. Your pension provider should provide a yearly breakdown of how your fund is progressing.

Be prepared to consider altering your investment risk. It is more likely that when you are younger and have more flexibility, you will consider higher risk investments.

Couple with bike on a walk across a field

However, as you approach retirement it is recommended you look more at medium or low risk investments. The safest bet is always to consider a mix of high, medium and low risk.

Conclusion

Pension drawdown is a method of accessing your pension when you are 55. It can offer an income in your later years which, unlike an annuity, can be more flexible and reactive to changes in your financial needs. However, unlike an annuity, the amount you receive can not be guaranteed and so there is an element of risk. Accessing your pension and maximising funds and benefits available for retirement can be very complex. That is why it’s a good idea to seek out the support of one of our regulated financial advisers to make sure your pension and the options you choose are right for you.

https://www.which.co.uk/money/pensions-and-retirement/options-for-cashing-in-your-pensions/income-drawdown/what-is-income-drawdown-apsqg6y8pg57

https://www.unbiased.co.uk/life/pensions-retirement/what-is-a-defined-contribution-pension#:~:text=A%20defined%20contribution%20%28DC%29%20pension%20is%20the%20most,reach%20your%20chosen%20retirement%20age%20%2855%20or%20over%29.

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