Since the dawn of pension freedoms in April 2015, pension drawdown and flexible drawdown pension schemes have become increasingly popular due to their flexibility.
So, what is a flexible drawdown pension?
Pension drawdown is the product where you can ‘withdraw money’ from the funds in your pension pot once you reach 55 years old (or potentially younger if you have a life-threatening medical condition and dependent on your pension provider)
As with most defined contribution pensions or SIPPs, 25% of your flexible drawdown pot is tax-free, and the rest will count as income and is therefore subject to income tax. Unlike a Pension Annuity, using drawdown will mean that the remaining pension pot that you have not taken will remain invested. By keeping the funds invested means they may continue to grow and benefit you in the longer term, but on the flip side, if the markets dip, your pension fund could also decrease.
How does a flexible drawdown pension work?
‘Flexible’ pension drawdown or ‘Flexi-access’ drawdown means you can potentially draw as much money as you need from your pension pot. It’s always advisable though to speak with a financial adviser (like our expert advisers) to put a retirement income plan together to help ensure you don’t run out of money in later life.
Are there any rules with Flexi-Access Drawdown?
No governmental rules state that you legally must take professional advice before entering drawdown with a defined contribution pension. There are although legal rules regarding defined benefit pensions, meaning that you must take financial advice if your final-salary pension is worth over £30,000. Furthermore, flexible drawdown is not often available with final-salary pensions, but different pension providers will have their own rules on how and when you can take your pension.
When deciding on how to take income from your personal pension, we would always recommend speaking with an expert on your options.
Do I have a limit on how much I can take from my pension?
Simply put, No, there is no limit to taking money out of your pension if you’re 55 years or older. As we mentioned, your initial 25% withdrawal will be free from tax, but the rest will be subject to income tax. When considering taking money from your pension, please always remember that these funds may need to last your entire life and cover any expenses you may have. Speaking with an expert could help you to manage your funds and put a plan together to ensure you don’t run out of money.
Do all pension providers offer flexible drawdown? Which is the best?
Not all pension providers and policies allow you to take money flexibly from your pension. Finding the best flexible income drawdown provider for you can be challenging, but using a pension professional can make things a little easier. By working with you, a professional can find out what are your needs and wants are for your pension, and the search across the market to find you the best provider.
The pension provider you have been investing with over the years, may not offer you the best deal, at the lowest price with the flexibility you require. It’s estimated that drawdown retirees are losing over £780 million* by not shopping around.
*Ft Adviser, 2019
When comparing pension providers and drawdown plans, one of the most important things to examine is the fees. Once you’ve identified the criteria you want, fees can make a significant difference in the amount of money you have to enjoy.
Take all of the hard work away, and speak with our advisers who can search the market for you and find the best deal for you.
Do all pension providers charge you for flexible drawdown?
Unfortunately, yes, pension providers will charge you to keep your money invested and manage your funds. But, the good news is that by shopping around you could reduce those charges, meaning more money for you.
Here are some of the charges you may need to watch out for:
- • A setup fee: If moving from another provider or even moving your funds into a drawdown policy with your current provider, you may incur a setup fee that will be usually be taken directly from your pension pot.
- • Annual management fees: As your money is still invested, actively managed funds may charge a percentage or a certain amount to manage your money.
- • Withdrawing money: Some providers will charge you for each withdrawal you make from your funds. It’s kind of a service/implementation charge. If regular small withdrawals from your pension is the way forward for you, then a plan charging this may not be suitable.
- • Changing how much you want to draw down: Although the aim is to be flexible with your money, some providers prefer you take regular amounts from your pension and could charge you extra fees if you keep altering the amount you wish to take, i.e. £1,000 one month then £300 the month after.
Speak with the experts.
Deciding on how to take your money in retirement is an important decision that could benefit from talking to an experienced professional. Our team are here to offer advice and recommendations, with our no obligation, no upfront fee service. Please call 0161 413 7051 to start the retirement planning process or find out more about drawdown here.