With the new pension and tax rules that came into force in April 2015 those over 55 have more control over how they access their pension fund. Historically, those reaching retirement age would typically use their pension fund to purchase an annuity guaranteeing them a set income for life. Instead, with pension drawdown you invest your pension fund and withdraw from it as required. This may appear to be an improvement but what are the pension drawdown benefits and risks?
If your pension fund is transferred to a pension drawdown scheme you can take lump sum amounts (up to 25% of the amount tax free), take a regular income or make drawdowns (withdrawals) as required. You can drawdown from the fund as you wish, potentially taking more in the early years of your retirement and reducing the amount you take as you grow older.
Pension drawdown benefits include:
- You have significantly improved control. You may withdraw what you want, when you want.
- You have much greater control over how any remaining fund is distributed to your beneficiaries after your death.
- The fund is invested and can continue to grow. You control the amount of risk you are prepared to take on investments.
- There are potential tax planning advantages.
Final Salary, Company Pensions and Personal Pension schemes can all be directed towards pension drawdown although special rules do apply to Final Salary Pensions.
Of course there are also significant risks including:
- Investment returns can go down as well as up.
- Poor investment decisions could result in your pension fund dwindling rapidly. You need to actively manage your investments, or pay someone to do it for you.
- Annuities are simple to understand and require minimal management. In contrast drawdown can be difficult to understand and mistakes can have major consequences.
- You run the risk of running out of money in retirement.
Ultimately the decision must be made based on your personal circumstances and your attitude to investment risk but it is not a decision to be taken lightly and it is recommended you seek out Independent Financial Advice to guide you through each of the pension drawdown benefits and risks in detail to aid your decision making process. Should you wish to talk through your options (with no obligation) give us a call on 0800 043 8341 or Email firstname.lastname@example.org. We are authorised and regulated by the FCA and operate across the UK. Alternatively, fill in the contact form below, add a suitable time in the comments box and we will call you.
The information in this article does not constitute financial or other professional advice.