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Home > Blog > Pensions > When Do I Need To Drawdown My Pension?
Key aspects of retirement planning are knowing how and when to start accessing your pension funds. One option is taking a pension drawdown. Pension drawdown is a flexible way of taking money from your pension pot when you need it while keeping the remainder invested. It enables you to take an income directly from your pension fund without buying an annuity (which is an insurance policy, paying a regular income).
The payment of your pension income can be flexible, allowing you to adjust the amount and timing based on your needs. You could start drawing down your pension from age 55. Before you do, however, you should consider a range of factors, such as your life expectancy, retirement goals, financial situation, and other personal circumstances.
These could vary from maintaining a steady income to achieving specific lifestyle goals, such as travelling or renovating your home. Once you have identified your goals, you should work with an independent financial advisory firm, like Hilltop, to understand the right pension drawdown strategy for you.
Unlike other retirement income options, pension drawdown allows your funds to remain invested. This gives your pension pot the opportunity to grow and allows you to access your money whenever you need it. With an annuity, on the other hand, you are locked into a set income, with no opportunity to change into a drawdown plan or take lump sums – typically for the rest of your life.
Taking a lump sum is another option, but it comes with no such guarantees and can quickly erode the value of your pension, potentially leaving you vulnerable in later life.
Pension drawdown offers a more flexible approach, enabling you to access your pension pot as and when you need it. This added flexibility allows you to adjust your retirement income depending on your circumstances.
As your funds are invested, they may also decrease in value, due to market fluctuations. Before moving into drawdown, always check the level of financial risk your plan has and potentially adjust to a more secure fund.
If you are wondering when to start drawing down your pension, several factors should be considered first, including:
You can usually start taking money from a defined contribution pension from age 55 (although this goes up to 57 from 2028). Obviously, the earlier you begin taking your money, the longer it needs to last, so you may want to wait before taking income from your pension to give you time and flexibility to plan for the future. It’s often beneficial to leave your funds invested in your pension for as long as possible to potentially grow and benefit from any tax breaks compared with other saving accounts.
Your current retirement goals and future plans are also important factors to consider. Think about what you want to do in retirement and how long you need your savings to last. While it may be tempting to splurge on holidays or renovations early in retirement, remember that you may need funds for cost of living increases or special family occasions.
Make sure you understand your current financial situation and whether you have enough savings or other sources of income to make pension drawdown a viable option. It is also important to consider the inherent risk of keeping your pension invested, with the chance that your investments could go up or down.
It is important to consider any personal circumstances that could affect whether taking a pension drawdown is the best option for you. Think about any other commitments you may have and how they could impact your retirement income, such as caring for a loved one or long-term health issues.
Various drawdown products are available, depending on how and when you plan to access your money. However, since the pension freedoms were introduced in 2015, most pension drawdown products now offer flexi-access drawdown. As the name suggests, this gives you flexible access to draw down funds as and when needed without requiring a minimum income request.
Pension drawdown allows you to access 25% of your pension tax-free. After that, how much you can expect to receive from your pension drawdown, either on a regular or ad hoc basis, depends on various factors. These include the value of your pension pot, the type of drawdown you choose, and how well your investments perform. You could use some of your funds to purchase an annuity to secure a regular income for added peace of mind, and keep the rest in drawdown for those little life enjoyments.
A key factor in making your retirement savings last is to limit the amount of drawdown you take each year and pay as little tax on your income as possible – ensuring that your pension pot does not run out too quickly. You’re also advised to regularly review your retirement plan and adjust your approach in accordance with any changes to your situation so that it continues to meet your needs.
Generally speaking, the first 25% of your pension income is tax-free. However, any amount over this will be subject to regular income tax rules. Pension drawdowns are generally subject to the same tax bands and income tax rates as a salary or other sources of income (including the state pension). To help minimise any tax implications, it’s always best to seek professional pension advice so you can take advantage of any tax reliefs available.
Although a financial adviser is not strictly necessary if you have decided to enter pension drawdown, seeking advice is usually a very worthwhile investment. Among many benefits, a financial adviser can outline how pension drawdown may affect your tax liabilities and suggest suitable investment options for your pension pot.
If you are approaching retirement age or already in retirement, and you are wondering when and how to start drawing down your pension, our expert team of pension and financial advisers is here to help. Hopefully this article will have given you valuable insights and guidance on the key factors to consider when making this decision and how to choose the right pension drawdown option for your needs. The next step is to contact us today to discuss your drawdown options…
For advice about pension drawdown or to arrange a consultation, please contact us on our websites or call us on 0161 413 7051.
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