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Pension drawdown gives you control over your pension fund. Take a retirement income that suits your needs while leaving the balance invested. Explore the opportunity to leave your remaining pension fund to beneficiaries (potentially tax free) on your death.
Pension Drawdown FAQ
What does pension drawdown mean?
Pension (or income) drawdown allows you to take (drawdown) your retirement funds and place them in investments of your choice to deliver you an ongoing pension income, a lump sum or both. Download our free pension drawdown guide to learn more.
Income Drawdown (known as capped income) has existed for some time but was replaced with flexi access drawdown in April 2015 as an alternative to long established annuity products.
How does pension drawdown work?
If you are over 55 years of age you may take all (or part) of your existing pension funds and transfer it into another suitable (and approved) fund such as a SIPP. Any funds not transferred into drawdown continue to grow, if invested wisely.
You can drawdown and continue working either full or part time to maximise the length of time your retirement fund may last. You can also continue to invest in your pension fund (subject to statutory limits).
At the point of drawdown you can take up to 25% of the drawdown fund as a tax free lump sum. You then decide on how the range of investments in your new SIPP will be managed to deliver a retirement income that meets your needs. However, unlike annuities you have no guarantee of a income for life and you must manage your funds to ensure they are not depleted to the point you become dependant on the state.
Is pension drawdown a good idea.
It very much depends on personal circumstances, your interest in and knowledge of investment strategies and your attitude to risk. Although annuities have been the subject of criticism in recent years they may still be the best option for many.
Pension drawdown gives you the flexibility to take a lump sum (of up to 25% of the fund value) and / or invest the balance to provide an ongoing income for the remainder of your lifetime. Unlike Annuities any remaining pension fund on death may be passed on, without inheritance tax. If you die before 75 there will never be a tax liability even when beneficiaries access the funds. If you die after attaining age 75 your beneficiaries will pay tax at their marginal rate when withdrawing from the fund.
What is best – pension drawdown or annuity?
It very much depends on your personal circumstances and your attitude to risk. Annuities guarantee a fixed income for life. You cannot outlive your pension fund, however long you live. ‘Joint-life’ annuities will also pay a spouse a pension until they die but there is no value to potentially pass on to children.
Annuity values, and therefore the amount they pay per year, have generally been accepted as poor over recent years which can make drawdown a more attractive option. At present, once you buy an annuity you can’t switch to drawdown at a later date, or transfer to another annuity product.
Pension drawdown gives you more control both in how you take your income and how the balance is invested. It is also possible to pass on any remaining pension fund when you die to your spouse or children. You may take as little (or as much) as you like in drawdown but there is no guarantee your pension fund will last through your retirement. Unlike Annuities you are responsible for carefully managing your pension fund and investments to ensure they last (as a minimum) your and your partners lifetime.
How do I set up a drawdown pension?
If your existing pension cannot facilitate “drawdown” to access drawdown you will need to take your existing pension fund and transfer it into a different pension fund that you may manage. A pension fund is usually transferred into a Self Invested Personal Pension (SIPP). A SIPP can accept a wide range of assets investments and you are responsible for managing those investments to maximise growth while minimising risk. You may draw on the fund held in the SIPP as you wish.
You should carefully review your existing pension fund before transfer to ensure you do not leave behind any valuable benefits as a result of the transfer. You should also note the pension provider may impose fees before they will allow access to the pension fund.
What is maximum pension drawdown?
There is no restriction on the amount that may be taken (withdrawn) from the available pension fund. You may take your entire pension fund (if you are over 55) in a drawdown arrangement.
There does appear to be some confusion as under the old rules (prior to April 15) only capped drawdown was available which, as the name suggests, placed restrictions on the amounts that could be taken from the pension fund in each tax year. Those in capped drawdown may remain with this product but it is not available (after April 15) to new entrants.
Some words of caution. If taking a pension fund into a drawdown arrangement 25% of the fund value may be taken tax free but the remainder will be subject to tax. Also, if you do take a sum before age 65 it is important to carefully calculate if the remainder will be adequate for your retirement.