When thinking about your retirement, one of the key decisions to make is in the type of pension you want to take out.
You can usually take up to 25% of your pension savings as a tax-free lump sum when you hit retirement, while the remaining 75% can then be accessed in a few different ways:
- An annuity gives you a guaranteed income for life or for a fixed term.
- A drawdown fund is invested in the stock market to provide a regular, adjustable income.
- You can take some or all of it as cash.
How does drawdown work?
Pension drawdown gives the holder the ability to take an income from their pension pot while leaving it invested in the stock market.
Taxed as income, a drawdown fund can be accessed in the form of lump sums or as a steady, regular income (or both). As an investment, these funds tend to be looked after by wealth managers who act on behalf of the beneficiary. Any unused funds are passed on when you die tax-free.
The benefits of pension drawdown
Arguably the most valuable feature of pension drawdown is its flexibility. Incomes from drawdown can be increased or decreased where necessary at any time, giving the beneficiary the control to plan their retirement income in the short and long term.
Drawdown funds also allow for larger lump sums to be taken out in an emergency, while yearly contributions to the fund are tax-free up to £4,000 a year. When compared with an annuity, a drawdown fund offers far more room for manoeuvre financially.
Those with drawdown funds also have the flexibility to buy annuities later. A short-term annuity will provide regular payments for up to five years, which can be an ideal choice for those who expect their income needs to remain consistent over a shorter period of time.
Drawdown also allows for any remaining funds to be inherited tax-free. Almost all annuities stop completely on your death, with some including the option to continue to have a small amount paid to your spouse. The ability to pass your investments on means drawdown is attractive for those who want to leave a larger inheritance.
Things to consider about drawdown
There are a few things to consider before you opt for a drawdown fund. The first is risk; the pension pot being invested in the stock market means that it is subject to market movements.
Investors can lessen their exposure to short-term fluctuations by taking a relatively conservative, long-term view. Fundamentally, the drawdown option is suitable for those who can accept a degree of risk – this risk can be factored into retirement planning but not completely voided. Every decision around pensions should be taken well in advance of retirement, but none more so than the growth and management of a drawdown fund.
These things considered, a drawdown fund requires both active management and a degree of financial acumen to make it work. For many, this will mean having the scheme managed by a financial adviser with the expertise to keep a pot healthy.
Drawdown funds are, ultimately, a form of conservative investing. They need to be treated as such and should be handled by experienced wealth managers that offer the right blend of guidance and flexibility.
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At Moneyfarm we put that balance at the heart of our business and our pension drawdown service is no different. We help our investors make confident, informed decisions about their retirement incomes while removing the universal stresses that can come with it.
Flexible withdrawals mean you can access your pension savings how and when you need to, with no additional fees.
Diversification is a key feature of any robust drawdown fund and our proven investment strategy makes full use of globally diversified assets.
Human guidance helps our clients cut through the jargon associated with investing. We’ll also handle all the admin, for ultimate comfort and freedom when you do retire.
Low costs when compared with traditional financial advisers means that you’ll keep more of your returns over the long term and, ultimately, take more into retirement.
What are my drawdown options?
Our drawdown product is split into three options to give all of our investors what they want from their retirement fund.
Each caters to different retirement plans and different ways of managing money, but the fundamentals are as follows:
A Pension Commencement Lump Sum (PCLS) is a lump sum withdrawal that allows for 25% of the pot to be taken either at once or in instalments tax-free. It won’t restrict how much you can save in your pension each year and the remaining funds will be left invested to grow.
A Flexi-Access Income Drawdown sees the fund taken as taxable income in monthly, quarterly or annual instalments, with the rest left invested to grow. You can adjust the frequency and the amount as required and you can combine this option with the PCLS.
An Uncrystallised Funds Pension Lump Sum (UFPLS) allows for ad-hoc lump sum withdrawals, as and when the investor chooses. You can usually take 25% of each withdrawal tax-free and the rest will be left invested to grow.
Not sure which applies to you? Our investment advisory team is on hand to run you through your options and discuss your financial situation in more detail – get in touch for more information.