How does pension drawdown work?
Pension drawdown is a way for individuals to access the funds in their retirement pension. It is an alternative to buying an annuity. With a pension drawdown, the individual retains control over their pension savings. You can choose to withdraw funds when needed.
The process of pension drawdown works as follows:
- The individual chooses to take their pension savings as a lump sum or to enter a flexible drawdown plan.
- The pension provider transfers the funds into an income drawdown
- You can withdraw from your drawdown account when needed.
- The pension savings in the drawdown account continue to be invested. For example, they may be invested in the stock market. This has the potential to grow the amount available for future withdrawals.
It is important to note that pension drawdown is a long-term investment. The funds in the drawdown account may go down and up in value. The plan will depend on investment performance. Individuals should carefully consider their options before entering into a pension drawdown plan.
What is a capped drawdown pension?
A capped drawdown pension is a type of pension drawdown plan. It places a limit or “cap” on the income taken from the pension pot each year. The UK government sets this cap, and it is based on your age and the amount of pension savings you have.
The purpose of the cap is to protect the individual against running out of pension savings too quickly. At the same time, it allows flexibility.
You can choose how much income they take and when. The capped drawdown pension plan is available is no longer an option to take after the introduction of pension freedoms. However, some people will still have capped drawdown plans.
Under a capped drawdown pension plan, the individual can take an income up to the capped limit each year.
Any unused portion of the cap can carry over to the following year. The capped limit is reviewed every three years. The income level may increase or decrease depending on your age and the value of your pension fund.
It is important to consider that although capped drawdown has an element of protection, there are still risks. There is still a risk that the pension savings may not last throughout your lifetime. You should seek financial advice before making changes to a capped drawdown plan.
What is a flexible drawdown pension?
A flexible drawdown plan is a new type of pension drawdown. It allows you to access your pension savings flexibly and tax-efficiently.
It provides greater flexibility than an annuity. Again you can choose how much pension income you take. There are rules set out under pension freedoms rules set by the government.
Under a flexible drawdown plan, you retain control over your pension savings. You can choose how to invest the funds within your plan.
You can also withdraw from your pension pot when needed. There is no set limit on the amount of income taken. However, there may be tax implications if you withdraw more than your personal allowance. The income you could take would be subject to income tax.
“A flexible drawdown plan” is available to individuals who have reached the age of 55.
Usually, you would have benefits in a defined contribution pension, such as a personal pension. It would be best if you considered that there are risks with a flexible drawdown plan. The pension savings are subject to investment risk and may go down and up in value.
Again you should seek financial advice before entering into a Pension drawdown plan. This will ensure that the plan suits your circumstances and financial goals.
Can I withdraw my pension before 55?
In most cases, you cannot withdraw your pension savings before age 55 unless you retire early due to ill health.
There are a few exceptions to this rule. If you have any unusual occupation with a protected earlier retirement age. Depending on your circumstances, you might be able to access your pension earlier than 55.
You should seek advice If you can take benefits before age 55. This is a complicated area of advice. We recommend speaking to a professional financial adviser.
You need to understand the tax implications and ensure you are making the correct decision. Early withdrawal of pension savings can have long-term consequences for your retirement income.
Can I take a lump sum from my pension?
You can take tax-free lump sum of 25% of your pension savings, subject to certain conditions and tax rules.
The pension “freedom and choice” reforms were introduced in the UK in 2015.
Individuals are now able to access their pension savings from the age of 55. Plans are in place to increase the minimum retirement age to 57.
It is important to consider that taking a lump sum could reduce your retirement income. The funds might not be invested to provide income. If you take an income, your money purchase annual allowance will be reduced. This allowance is the amount you can pay into pensions each tax year.
There could be tax implications for taking a lump sum from your pension. You need to check if your pension fund is over the lifetime allowance. Depending on the size of the lump sum, a portion might be subject to a pensions tax charge.
It is vital to seek professional financial advice before taking a lump sum. Again understanding the options you have is critical. Understand the tax implications and ensure that you are making an informed decision.
How do I ensure I do not run out of money?
There is no guarantee that your pension fund will not run out of money. Pension savings are subject to investment risk and can go down and up in value. There are a few tips to help ensure your pension fund lasts through your retirement:
- Diversify your investments: Spread your pension savings across various asset classes. These should include stocks, bonds, and property, to reduce the risk of loss.
- Consider your investment strategy: Any investment strategy should match your risk profile. It should take into account your circumstances and financial goals. This can help ensure that your pension fund lasts throughout your retirement. Seek advice to develop a suitable investment strategy.
- Regularly review your pension fund. This can identify potential issues and change your investment strategy.
- Consider an annuity: An annuity can provide a guaranteed income for life. This can help ensure that your income lasts throughout your retirement.
Remember that it is essential to seek advice. Consult a qualified financial adviser. Before you make any changes understand the decision you are taking. Additional information is available on the government pension-wise website.