Pension Drawdown Pros and Cons

What is pension drawdown? What are the pension drawdown pros and cons and what are the advantages of pension drawdown over an Annuity are questions we are asked on a regular basis. The following summary covers the key issues you need to be aware of before making any decisions on your best way forward.

What Is Pension Drawdown

In essence, pension drawdown offers the pension holder more control over how they take their pension benefits and how they pass any remaining pension onto beneficiaries after their death. Unlike an annuity in drawdown there is no set monthly pension. The pension holder may take whatever income they want when they want from their pension fund.

How Does Pension Drawdown Work

In Drawdown, income can be withdrawn from a pension fund as required either as regular income or in lump sums. You can drawdown from the fund as you wish, potentially taking more in the early years of retirement, reducing income as you grow older. It is your responsibility to manage the pension fund as an investment to ensure it lasts a lifetime.

One, or more, pensions may be converted to drawdown using a personal pension scheme set up for the purpose. Current (and frozen) Company Pensions and Personal Pension schemes can all be converted to pension drawdown.

Drawdown only applies to those with defined contribution pensions (not final salary pensions). To access the benefits of pension drawdown requires a final salary pension transfer to a defined contribution scheme. This is not something to attempt without detailed consideration of the risks involved.

How We Can Help

We specialise in pension advice and can help with one, or more, of the following:

  • Advise you on pension drawdown arrangements, their benefits and risks.
  • Assess your current pension arrangements and advise if pension drawdown is the right move for you.
  • Help build a plan to maximise investment growth while minimising risk
  • Recommend the most appropriate receiving pension arrangement for you.
  • Move one (or more) existing pension schemes into a drawdown arrangement.
  • Arrange tax-free lump sums.
  • Ensure any remaining pension fund is left to chosen beneficiaries on your death.
  • Manage your pension fund for growth.
  • Manage your tax position.

Drawdown is not the right option for everyone and you should carefully consider the pros and cons of pension drawdown before taking action.

To arrange a free pension review to establish if pension drawdown is the best way forward for you complete the contact box below and we will call you back to arrange a convenient date and time to talk.

The Costs Of Pension Drawdown

Charges and fees can significantly erode pension fund value over time and should be monitored closely. There may be both one-off and ongoing charges associated with pension drawdown. These may include fees to transfer out of an existing pension arrangement and fees to set up the new pension drawdown arrangement.

Once in drawdown, there may be a range of charges including management charges and charges applied whenever income is withdrawn from the fund. Charging structures vary according to the drawdown scheme. The level of charges for the same activity can also vary across providers.

Pension Drawdown Pros and Cons

It is important to carefully consider both the pros and cons of pension drawdown.

Benefits

  • Control. You may withdraw what you want when you want.
  • Any remaining pension fund may be distributed to beneficiaries after your death.
  • Your fund is invested and can continue to grow.
  • You control the amount of investment risk you are prepared to take.
  • There are potential tax planning advantages.

Risks

  • You could run out of money in retirement.
  • You need to actively manage your investments, or pay someone to do it for you.
  • Investment returns can go down as well as up.
  • Annuities are simple to understand and need minimal management. In contrast, drawdown can be difficult to understand and must be managed over time..
  • Tax implications.

The Alternatives to Drawdown

Before the new pension and tax rules (April 2015), the only real choice at retirement was an annuity but several economic factors have driven down the value of annuities in recent years. That said Annuities do offer a guaranteed income for life and should not be discounted as a retirement option. It is possible to combine an element of Annuities with drawdown at retirement.

Should you have any questions simply complete the contact box below and one of our advisers will Email you an answer (without cost or obligation) or visit our Pension drawdown frequently asked question and answer page

Pension Drawdown Rules

Existing pension arrangements may not offer a drawdown option and it may be necessary to transfer to a different pension fund. Some drawdown arrangements do not offer the same level of flexibility as others and may not be suitable for everyone. Some providers only offer drawdown based on a minimum pension fund value.

The pension drawdown rules can be complicated and are discussed elsewhere on this blog. The main points to note are:

  • You may only access pension funds when you are over 55 years old
  • You may take a tax free sum (up to 25% of the fund value) at the point pensions are taken into drawdown.
  • You may leave any remaining pension funds to your beneficiaries (tax free in some circumstances) on your death.
  • Any withdrawals you take from your drawdown fund (after the tax free element) will be taxed as income.

The Pension Drawdown Process

Assuming after due consideration of all the retirement options you have decided drawdown is the best option for you. The basic steps to follow are:

  • Contact the provider (they may have changed over the years) and ask for a valuation on each pension.
  • Check pension documentation to ensure you do not inadvertently give up any valuable benefits
  • Check if existing pension providers offer a drawdown option and on what terms.
  • Find out what your state pension will be.
  • Draw up a retirement plan
  • Consider the tax implications
  • Choose drawdown providers
  • Complete the relevant paperwork

You may wish to take advice (in which case the adviser will take on the above steps) or if you wish to take the DIY route. There are Government sponsored organisations that will provide free pension guidance but they will not provide advice on what you should do given your unique circumstances.

The above represents a basic outline of the pension drawdown process. Drawdown is not the best option for everyone and it is best to take advice. Mistakes can be costly.

Managing Your wealth In Drawdown

Should a decision be made to move into drawdown it is vitally important the resulting pension fund is managed over the long term to maximise investment growth. If you are not prepared to either take on this task yourself (or to pay someone to perform the task on your behalf) then drawdown is perhaps not the best option for you.

If you do decide to take on the drawdown fund investment task yourself it is important to decide what you will do in the long term as you get older and/or your health deteriorates. Hopefully, it will be many years before the worst happens but it is important to have a plan in place.

Tax Implications Of Pension Drawdown

The amount you can invest in a pension and receive full tax relief depends on your earnings for the year and is capped at £40,000. This is known as the annual allowance.

At the point, first income is taken from a drawdown account the tax relief limit falls to £4,000. This limits your ability to top up your pension fund if you do have the funds available.

It is important to note the reduced Annual Allowance only applies when income is taken. It is, therefore, possible to take the initial tax-free lump sum and to continue to receive the full £40,000 annual allowance if no income is taken from the drawdown fund.

For some individuals with large pension pots, the lifetime allowance may also be a concern. As the name suggests the lifetime allowance (currently £1.03m) is the overall limit an individual can accrue in their pensions during their lifetime without incurring an additional tax charge when they start to draw benefits.

Successive Governments have a history of changing tax percentages and limits. It is therefore important to keep up with the latest legislation or use an appropriate adviser.

Download Our Free Pension Drawdown Guide HERE to learn more

How to Find an Adviser To Help With Pension Drawdown

Any decision to enter pension drawdown (or not) must be taken as part of a retirement planning exercise. You may have several pensions, some active and some frozen. Some of those pensions may offer valuable benefits and be best left where they are. ISA’s and other investments should be considered as part of the mix. There is lots to consider.

To make an informed choice between personally researching and implementing a pension drawdown arrangement or taking pension drawdown advice (with an associated cost) there are some basic questions to answer, including:

  • How capable am I of understanding the key issues and making decisions?
  • Do I have the time/inclination to take on the task myself?
  • What is my attitude towards risk and loss?
  • What is the maximum potential for capital erosion if a wrong decision is made?
  • How likely is it I will make that wrong decision?
  • How does the potential for capital erosion compare with the cost of financial advice?
  • If I take advice how can I be assured the advice will be of high quality and better than the information I may collect from published sources?
  • What is the availability of high quality financial advice? Will I be able to find a suitable financial adviser?

Ultimately the decision depends on your personal circumstances and your attitude to investment risk. Pension drawdown is not without risk but with the value of annuities still recovering from an all time low its benefits make it worth serious consideration.

To arrange a free pension review to establish if pension drawdown is the best way forward for you complete the contact box below and we will call you back to arrange a convenient date and time.

We are a long established Financial Advice firm specialising in pension advice. Most of our work is related to Frozen pension solutions, pension drawdown arrangements and final salary pension transfer advice. You can read more on our about us and testimonials pages. We are authorised and regulated by the FCA and operate across the UK. Should you wish to talk through your options (with no obligation) give us a call on 0800 043 8341 or Email enquiries@thepensionreviewservice.com.

To learn more download our free pension drawdown guide or visit our Pension Drawdown common questions with answers page

 

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance. This page is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. Tax regulations can change and any figures quoted above are at the date of publication.