PENSION DRAWDOWN EXPLAINED

If you need regular income throughout your retirement, pension drawdown could provide this by using your own pension pot. Is this the answer for your retirement needs?

Pension drawdown has become a popular way of funding retirement. Pension drawdown can provide a regular income by reinvesting your pension pot into funds that are specifically and strategically designed and managed for this purpose.

Pension drawdown occurs when a client continues to keep their pension fund invested whilst simultaneously withdrawing money from it, with the aim of providing a regular income derived from your own pension fund.

So, how does it work?

Once you reach retirement, you can leave your pension fully invested with your provider, but you also then have the option to take out what is referred to as a ‘drawdown’. You can choose to take up to a quarter of your pension pot tax-free, which can be taken as regular payments or as a lump sum. Any withdrawals taken after the tax-free portion has been exhausted will be taxed as income.

Your drawdown fund can be invested in funds that you will have approved and agreed to with your financial adviser. The money you invest may continue to grow, however be aware there is also the risk that your investments may underperform due to unexpected poor market conditions. If you take too much out of your pension at an early stage, your investments could suffer, and you may not be left with enough money to live on. It is important to be aware that there are also charges involved with withdrawing funds, which can prove to be expensive.

If you take too much out of your pension at an early stage, your investments could suffer, and you may not be left with enough money to live on. It is important to be aware that there are also charges involved with withdrawing funds, which can prove to be expensive.

What are the rules?

Current UK Government rules have become more flexible than they used to be. No limits are put on how much money you can withdraw from your pension savings and drawdowns are designed to suit you and your needs. However, there will be taxation implications which you should discuss with your financial adviser.

Example:

A client could withdraw it all at once, take monthly payments to mirror an income, withdraw an annual ‘salary’, or dip into their fund as and when they need to.

Although, this may seem like and great way to invest, it may not be the right option for you. You could end up paying unnecessary tax. You could run out of money if they drawdown too much too quickly.

If you would like to discuss and learn more about pension drawdown, talk to your financial adviser today.