Flexi access Pension Drawdown is an increasingly popular option at retirement. In this post, we discuss the pension drawdown process. What is involved and what timescales you can expect?
It is important to note Pension Drawdown only applies to defined contribution schemes (also known as money purchase schemes). Those with final salary pensions cannot access drawdown unless they first transfer out of their scheme to a personal pension arrangement.
Let’s assume you have traced all your pensions and you have the latest statements, terms and conditions. You have an estimate of your state pension entitlement and details of all your current assets. With this information in hand the basic process is as follows:
- Review your existing pensions.
- Build your retirement plan.
- Consider the tax implications.
- Decide on a pension provider and/or platform.
- Complete the relevant paperwork.
Check Your Existing Pensions
It is important to understand your current pension scheme (or schemes) terms and conditions. Some schemes offer valuable benefits that should not be given up without careful consideration.
Your existing pension schemes may offer a pension drawdown option. With others, it will be necessary to transfer to another scheme to access drawdown. If it is necessary to transfer there may be fees and charges. The potential impact of those fees should be considered carefully, especially if nearing retirement.
Build A Retirement Plan
You may wish to use a financial adviser to help or you may take the DIY route. Whatever route you choose building a retirement plan is an important step.
An adviser will consider your personal circumstances and objectives and make a recommendation on the best way forward. If following the DIY route there are Government sponsored organisations that will provide guidance but not advice on what you should do.
If taking advice there will be a cost involved. This should be measured against the potential loss if you make an error when taking on the task yourself.
There are many issues to consider when building a plan. These include how far you are from retirement? What are your plans (if any) to increase your retirement fund? What income will you need in retirement? Do you hope to pass on remaining pension funds to beneficiaries on your death? Do you have any other assets that you can use to help fund your retirement.
Pension drawdown is just one of the options available at retirement. You may choose a single option or a mix depending on your unique circumstances and plans for retirement. The size of your pension fund could determine which options are worth consideration and which are not.
Consider The Tax implications
If you wish to limit your tax bill, or because of the way you access your pension fund you end up overpaying tax that takes many months to reclaim it is important to manage your tax situation and plan appropriately.
When entering drawdown 25% of the pension fund value is available tax free. The remainder is crystalised and invested. From this invested pension fund a (taxable) income may be withdrawn to fund retirement.
Once income has been taken from a pension drawdown fund the amount you can continue to pay into a pension fund drops to £4,000 each year restricting the tax relief that is available.
The Lifetime Allowance and Inheritance Tax implications should also be considered. Tax law can be complex, it can change, and it is best to take financial advice if in any doubt. The above only covers the most common tax considerations. There may be more to consider depending on individual circumstances
Decide On Pension Provider And/Or Platform
Your existing pension provider may offer a drawdown option. They may offer the best overall solution to match your circumstances but to assume so could be costly. It is important to compare your current provider against the rest of the market.
If you do move your pension to another provider there could be costs involved and they should be factored into your decision making process. You will need to find a platform that delivers the flexibility you require. You will then need to build a portfolio of investments in line with your attitude to investment risk taking account of your ability to absorb losses within the portfolio throughout your retirement.
Each option will have its own pros, cons and fee structure. It is important to ensure whatever solution you choose meets your individual needs (refer back to your plan). Don’t pay for what you don’t need but remember cheapest is often not the best over the long term.
Complete Relevant Paperwork
It is important to be prepared for an element of bureaucracy. Providers have an obligation to perform relevant checks. They will request information from you and there will be a number of forms to complete This process can take more time than you might expect. Of course, if employing an adviser they will explain everything and take on the administration tasks on your behalf.
Timescales To Complete The Drawdown Process
The process will almost certainly take longer than you expect. Assuming a retirement plan is in place and it is decided to move a pension fund to another provider then it can take between four and eight weeks to have a drawdown pension plan in place and secure a tax free sum.
Should you have any questions then give us a call on 0800 043 8341 or email us at email@example.com and we will be happy to help.
This blog 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.