Pension Drawdown: A Good Idea?

What are the benefits of Drawdown?
Income drawdown allows you to take money from your personal pension, without accessing all your retirement savings in one go or having to lock in your money into a specific product. Any pension funds you do not withdraw remains invested with your pension provider, potentially allowing your pension pot to keep growing after you have retired.

Not all pension providers and policies offer pension drawdown. If you have an older pension, it may also be governed by slightly different pension drawdown rules, and you should speak to your pension provider or scheme administrator for more information.

How is Drawdown different from Pension Annuity?
Pension Drawdown is different from buying a pension annuity because your income is not guaranteed, and the value of your retirement fund can grow or reduce, depending on how your investments perform.

With a Pension Annuity, you are buying an insurance product with your money that will deliver a set amount of income regularly. Once you have purchased an annuity, you will receive the agreed amount of income usually monthly, and this cannot be reversed.

If you are unsure whether buying an annuity or pension drawdown is right for you, it’s advisable to speak with a pension professional before making any decisions. Read more about Pension Annuities here.

How Pension Drawdown works.
As soon as you pass your 55th birthday, you can potentially begin accessing your personal or workplace pension. If you have a defined benefit/final salary pension, the date you can access your pension will be directed by the administrators.

With a personal pension, you can take up to 25% of the value tax-free as a single lump sum, a few lump sums or as regular withdrawals until you hit that 25% marker. Your tax-free amount does not take any of your personal tax allowances, but once your withdrawals exceed this threshold, you’ll be subject to income tax. It’s important to consider how much you withdraw from your drawdown pension, and when you do so, to ensure you don’t move into a higher tax bracket, but your financial adviser should be able to help with this.

One of the main advantages of a drawdown pension is that your pension fund could potentially still grow. By continuing to grow means your retirement fund could allow you to get more tax-free money.

Speaking with a financial adviser is advisable.
As pension drawdown gives you more freedom, it also places greater reliance on you to ensure your pension pot lasts through retirement. It may seem tempting when reaching 55 years old, to take a tax-free lump-sum and spend it on those things you have always wanted to do. But remember, your pension may be your only source of income when you retire and taking a chunky 25% deduction, may mean your retirement is not as comfortable as you would like.

Before making any decisions, we recommend speaking with an adviser who can help you plan for retirement, put a cash flow model together and show you how much money you can comfortably take and still enjoy a good lifestyle in the future. Financial advisers can also check to see if you are on track to deliver that retirement you want or if you could make some changes today, to benefit your future.

Want to know more about Pension Drawdown? Speak to our team on 0161 413 7051 or click here to find out more.

Important information: Our website offers information about investing and saving, but not personal advice. If you’re not sure which services are right for you, please request advice from Hilltop’s independent financial advisers. Remember that investments can go up and down in value, so you could get back less than you put in.

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