How Much Should You Drawdown From Your Pension?

Pension drawdown is a flexible method of accessing your pension that enables you to vary the amount and frequency of income you take. The remainder of your pension stays invested, meaning that it has the potential to continue growing, but can also decrease in value with market fluctuations. Because of this, it’s important to consider the risks before deciding whether to enter into a pension drawdown scheme.

When it comes to withdrawing money from your pension, there are a few key factors to consider. Your age, life expectancy, health, income needs and investment returns are all factors that impact how much to safely withdraw from your pension pot. 

How much you decide to draw down from your pension pot may also impact your tax liabilities. If your combined pension income exceeds the limit for personal tax allowance, then your pension withdrawals are subject to income tax. 

In this article, Hilltop explains how an independent financial adviser’s advice and guidance can help you make tax-efficient pension withdrawals, enabling you to make the most of your retirement in the short, medium and long term. Read on to find out more. 

How Much Can I Draw Down From My Pension?

As mentioned, how much you can safely withdraw from your pension will depend on several factors. The amount you decide to draw down should be tailored to your circumstances, so it can be beneficial to seek professional advice before making any decisions. A regulated financial adviser could help you to make your pension funds go further.

Do You Pay Income Tax On Pension Drawdowns, And How Much Can You Draw Down From Your Pension Tax-Free?

Yes, pension withdrawals are subject to income tax. As such, the amount you decide to draw down from your pension pot can impact your tax liability. Therefore, it is important to be mindful of tax reliefs, like the initial 25% tax-free lump sum available on defined contribution pensions and the £12,570 personal tax allowance. 

Remember that once you have taken the tax-free lump sum, any pension income (including the state pension and other earnings like rental income) exceeding the personal allowance will be taxed at the relevant tax rate.

How Do I Balance Wants Vs Needs When Drawing On My Pension?

When deciding how much you should draw down from your pension pot, weighing up short-term wants against long-term needs is important. For instance, in the early years of your retirement, you may harbour ambitions to use your newfound spare time to travel or renovate your home. However, you should always temper such choices with thoughts of how much money you might need to leave in your pension pot for later life.

These are big decisions that needn’t be taken alone. A financial adviser can bring a detached perspective to such matters, helping you see the bigger picture. For example, as part of the pension planning process, a financial adviser can help you create a timeline that factors the number of retirement years you plan to fund using your pension savings. Such a plan can be invaluable for deciding how much to draw down from your pension.  

What Are The Different Options For Pension Drawdown? 

There are various different types of pension drawdown products on the market, depending on how and when you plan to access your pension savings. However, since the pension freedoms were first introduced in 2015, most pension drawdown products now offer flexi-access drawdown. As the name suggests, this pension scheme gives you flexible access to your funds when needed..

How Do I Adjust If My Circumstances Change?

The beauty of pension drawdown is that it allows you to tailor your withdrawals however you like. Unlike the fixed income of an annuity, you can take out more or less as the need arises. So if there is a significant change in your circumstances, you can review the amount of money you are withdrawing from your pension and make adjustments accordingly. As ever, a financial adviser can offer tailored advice to meet your specific needs. 

Get Pension Drawdown Advice From Hilltop

To summarise, pension drawdown allows you to make flexible withdrawals from your pension while keeping the bulk of your funds invested. But remember – once you have taken the 25% tax-free lump sum, any pension income over and above the personal allowance will be subject to the usual income tax rates. So, before making any withdrawals, you should always consider your tax liabilities. 

Bearing in mind that most people underestimate their life expectancy, you should consider how long your pension funds might need to cover your expenses. You’ll also need to think about your age, health, income needs and investment returns. 

Pension drawdown does come with some risks as well as benefits – keep in mind that whilst your investments can grow, there is also a possibility that they could shrink.

The best way to assess whether pension drawdown is suitable for you is to seek pension advice from a financial adviser. Hilltop’s in-house team of over 50 fully trained professionals – including independent financial advisers – keep things simple, providing you with all the tools necessary to make informed decisions about your finances. Our pension experts can help work out a pension drawdown plan that has you covered in both the short and long term.

If you would like advice about pension drawdown or need personalised advice on your retirement planning strategy, please contact us on our website or call us on 0161 413 7051.

Hilltop’s offices are open 9am to 5pm Monday to Thursday and 9am to 4pm on Fridays. Hilltop Financial Planning is authorised and regulated by the Financial Conduct Authority. Our advisers have over 100 years of combined experience and knowledge of working with people like you and helping them to make the most of their finances.