Drawdown is one of the key buzzwords used in the financial industry, whether that’s relating to pensions or equity release. Since Pension Freedoms, introduced in 2015, Pension Drawdown has become a popular choice for people when looking to take an income from their pension.
Pension Income Drawdown allows people to take retirement income flexibly, withdrawing a small cash sum from their pension pots when required, leaving the rest invested with the potential to grow still.
As pension specialists, we’ve put together a list of frequently asked questions that will hopefully give you guidance to those questions you forgot to ask.
You shouldn’t use these answers as personal financial advice, and we always recommend speaking with a fully qualified FCA regulated adviser like us at Pension Works.
A. Some personal pension plans will allow you to move your pension savings into drawdown in stages – known as ”phased drawdown”. Phased drawdown means that you do not have to take all your tax-free cash in one go. This can be useful if you plan on cutting back your working hours or need to control your income tax liability.
A. Yes. Many personal pensions will be split into two parts. Part one is a savings element where you can make further pensions contributions, and part two, an income element where income withdrawals are made. However, it is vital to be aware of the Money Purchase Annual Allowance (MPAA), which limits how much you can contribute to a pension once you have made flexible withdrawals from a plan.
A. Most pension schemes limit the amount of tax-free cash (Pension Commencement Lump Sum) you are allowed to take, to 25% of the value of the pension. However, there are some occupational pension schemes; section 32 buy out policies or deferred annuity contracts that have an entitlement to more than 25% tax-free cash. Please speak to your financial adviser if you think you have one of these pensions.
A. The standard minimum pension age under a registered pension scheme is currently 55. However, there are certain instances where a member may be able to access their benefits before age 55. These circumstances could be severe ill-health or have a protected retirement age due to their occupation.
A. There is no requirement for any pension provider to offer flexible-access drawdown. Additionally, if you have benefits in a defined benefits scheme and you wish to take advantage of flexible-access drawdown, you would need to give up these guaranteed benefits and transfer your pension. This decision should be considered very carefully as to whether it is in your best interests.
A. Defined Benefit pension schemes are designed to provide you with a guaranteed income payable for life. They, therefore, do not offer flexible-access drawdown.
A. You can use your remaining drawdown fund to buy an annuity at any time, although some pension annuity providers (insurers) will set an upper age limit, typically 95.
A. Yes. There is no limit to how many drawdown pension plans you have in place. However, it worth seeking financial advice to see if there would be any benefits in consolidating multiple drawdown pots.
A. Once you have withdrawn the maximum tax-free cash from your pension fund, any income that you withdraw will be subject to income tax. If you have some of your Personal Allowance left (currently £12,500 for 2019/20), then income withdrawals from a drawdown pension will count towards this allowance. The amount of tax you pay depends on your total income for the tax year and your tax rate.
A. Unlike defined benefit pension schemes or pension annuities, there are no guarantees with a drawdown pension. Your money is invested so its value can fall as well as rise. Additionally, if you withdraw too much income, your pot could run out.
A. If funds are remaining in your drawdown pension when you die, this can be passed on to your nominated beneficiaries. You should complete an expression of wish form with the pension provider so that they know who you would like to consider receiving your pension benefits when you die. Please speak to your financial adviser for more details.
These are just a few questions we get asked regarding private pensions, defined benefit pensions and pension drawdown.
Pension Works is authorised and regulated by the Financial Conduct Authority, based in Knutsford, Cheshire, UK.
For independent financial advice regarding your private pensions or pension drawdown, please speak to our team on 0808 164 2664 or make an enquiry.
This can be found on your payslip, P60 document or letters about tax, pensions or social benefits.
If you have (or have had) a pension that is described below then we can potentially carry-out a Pension HealthCheck.
Defined Contribution Pensions
These are ‘Pot of Money’ pensions where the benefits provided take into account the value of the fund at retirement. They can be personal pensions or Occupational Pensions. There are no guarantees as to what pension will be provided. This will be a reflection of contributions made and investment growth.
Defined Benefit Pensions
These offer the promise of a guaranteed pension at retirement which reflects the length of service with an employer. It will be based on either the Final Salary or Average Career Salary of the employee. Providing the company is still in existence, there is no investment risk for the pension receiver. This type of pension is becoming less frequent.
This is a generic term for pensions that are not workplace schemes.
Group Personal Pensions
Employer-sponsored schemes – each member has a personal pension plan, and their contract is with the pension provider. The employer’s role solely is to select the scheme provider, decide if there should be any restrictions on fund choices and take contributions from the employee’s pay and forward them with employer contributions to the pension provider.
A private pension arrangement or personal pension is taken out by a sole-trader or self-employed worker.
State Earnings Related Pension (formerly Graduated Pension and subsequently State 2nd Pension or S2P) was an additional element of State Pension for employees. The amount of pension was linked to the employee’s salary. SERPS was abolished in 2016 when the flat rate State Pension was introduced.
Private pensions are contracts between the pension member and an insurance company or another pension provider.
These are personal pensions where the member has a much wider choice of investments, including commercial property and single company shares.
Personal Pensions with a set of rules that impose amongst other things a maximum annual management charge (AMC), low minimum contribution levels (£20 per month) and an appropriate Default fund.
Private pension linked to an employer’s Defined Benefit Scheme but separate from the Scheme’s internal Additional Voluntary Contribution (AVC) arrangement – largely defunct since the rules were eased several years ago, allowing people to contribute to both personal and employment schemes as they wish.
Money Purchase Pensions
This is another name for Defined Contribution Pensions.
Unfortunately, we are unable to help clients who currently work for or have a pension from one of the following:
If you are unsure about the type of pension(s) you hold, please contact us on 0800 756 1288 or email email@example.com