The Benefits & Risks Of Pension Drawdown

Pension drawdown gives you greater freedom over how you access your retirement income compared with the traditional annuity.

Pension drawdown provides income flexibility, enabling you to withdraw lump sums of varying amounts whenever you choose.

Whenever you make a pension withdrawal, the remainder is invested. As such, there are pension drawdown benefits and pension drawdown risks to weigh up before choosing this option.

Many of which we have detailed in this guide to inform your decision.

Key Summary

Key Advantages Key Disadvantages
✅  Full control over your savings and investments ⛔  Risk that you might run out of money
✅  Potential for inflation-beating growth ⛔  Poor investment returns can reduce your income
✅  Flexible means of taking your retirement income ⛔  Requires careful management of investments
✅  Ability to pass on remaining funds to loved ones ⛔  An annuity may provide more income in later life
✅  Greater potential for tax efficiency ⛔  Withdrawal and processing charges and fees

Pension Drawdown Benefits

There are various pension drawdown benefits that make it an attractive retirement planning option, including the following:

Full Control Over Your Savings And Investments

Pension drawdown enables you to control how and where the remainder of your pension pot is invested after you have taken money out.

You can either choose your investments yourself, via ready-made ‘investment pathways’ offered by some providers, or with the advice and ongoing management of a financial adviser.  

Potential For Inflation-beating Growth

One of the advantages of keeping a proportion of your pension savings invested is that your investment portfolio has the opportunity to grow.

The potential returns from your investments can therefore give you more spending power in the face of rising prices due to inflation, which might otherwise erode the value of your pension. 

Flexible Means Of Taking Your Retirement Income

Another pension drawdown benefit is that it gives you the flexibility to withdraw your income in the way that best suits you.

Flexi-access drawdown allows you to either choose to take a regular income or access your savings on a more ad hoc basis, giving you much more freedom regarding how and when you draw down funds.

Ability To Pass On Remaining Funds To Loved Ones

Pension drawdown allows you to pass on your money when you die. If you die before the age of 75, any remaining funds can pass tax-free to your chosen beneficiaries, who can take a lump sum or regular income.

If you die after age 75, any income your beneficiaries receive will be added to their income and taxed at their marginal rate.   

Greater Potential For Tax Efficiency

One of the knock-on pension drawdown benefits of having greater flexibility over how and when you take an income is that you can manage your pension withdrawals in a more tax-efficient way.

If you are in a position to do so, keeping your withdrawals as minimal as possible enables you to pay the least amount of tax possible. 

Pension Drawdown Risks

Drawdown is not without its disadvantages, so it is worth bearing the following pension drawdown risks in mind when weighing up your retirement income options:

Risk That You Might Run Out Of Money

Of course, one of the major pension drawdown risks is that having unfettered access to your savings can mean that you may eventually run out of money if you are not careful.

Many people underestimate how long they might live, withdrawing unsustainable amounts of income that could leave them with a shortfall in later life.

Poor Investment Returns Can Reduce Your Income

The unpredictability of the stock market means that investments can go down as well as up, which means that you could receive less than you put in.

As such, poorly performing investments can erode the value of your pension. For that reason, it is essential to take financial advice to ensure you spread the risk effectively. 

Requires Careful Management of Investments

While some pension savers may enjoy the opportunity to take some control over the investments tied to their pension drawdown arrangement, the potential for investment losses makes it essential to keep regular tabs on the performance of your investments to ensure they remain on track. 

Annuity Rates May Provide More Income In Later Life

Some people may find that an annuity or enhanced annuity is better for the longer term. With an enhanced annuity, providers take a gamble on your life expectancy. Therefore, if you have health issues it may pay to take out an annuity.

Plus, if your money is still invested, the government could say you need to use your savings to pay for medical or residential care. Whereas, with an annuity, that money is already spent. So you may not have to pay out from your assets.

Various Charges And Fees To Keep In Mind

The flexibility of pension drawdown comes at a price. Pension drawdown providers often levy various charges for the privilege.

Some of those charges may include setup fees, administration charges, exit and transfer fees to name but a few. So it pays to shop around to ensure fees and charges don’t erode the value of your pension.

Learn more about Hilltop’s Pension Drawdown service.

Pension Drawdown Benefits And Risks Frequently Asked Questions

Is There A Minimum Pension Fund Size Required For Pension Drawdown?

There isn’t a minimum pension size required for pension drawdown. However, it is worth bearing in mind that you will need a sizeable chunk of savings to ensure you don’t run out of money in later life.

This is currently estimated at around £30,000 per couple annually, but is of course based on your lifestyle. Plus, you will need to factor the various charges and fees into the equation to ensure you have enough to cushion those costs.

How Do I Determine The Appropriate Income Withdrawal Rate In Pension Drawdown?

This is a very subjective decision but not one you necessarily have to make on your own. It very much depends on your circumstances.

The best way to determine the appropriate income withdrawal rate for pension drawdown is to seek retirement planning advice from a financial advisor to ensure you make the best choice for you.

Can I Change My Income Withdrawals During Pension Drawdown?

Yes. This is one of the major advantages of choosing pension drawdown. You have the flexibility to choose how much and how often you take money out of your pension pot.

That can either be through a regular income or on an ad hoc basis. Again, it is worth taking financial advice to ensure you make the most tax-efficient decisions.

How Does Investment Performance Impact My Pension Drawdown Funds?

Investment performance can have a big impact on your pension drawdown funds. On the plus side, if your investments perform well, your pension fund can continue to grow.

So your retirement income has the potential to increase accordingly. However, the value of your income could also diminish if your investments perform badly.

Pension Drawdown Advice

Learn More About Pension Drawdown

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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 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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