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.
Q. Do I have to move my whole pension pot into drawdown?
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.
Q. Can I still pay into my pension once in income drawdown?
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.
Q. How much tax-free cash can I take?
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.
Q. How old do I need to be before I can start drawdown?
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.
Q. Are you able to drawdown on all types of pensions?
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.
Q. Can I drawdown my defined-benefit pension scheme?
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.
Q. Can I still buy an annuity if I’ve already started to 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.
Q. Can I have multiple drawdown plans?
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.
Q. Do you pay tax on pension drawdown?
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.
Q. Can I run out of money when in income drawdown?
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.
Q. What happens to your drawdown pension when you die?
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.