As your retirement planning starts to take place, there are several options to think about to make sure you get the most from your pension savings. ‘Pension freedom’ now offers a range of choices, such as income drawdown. You may have heard about the 25% tax-free lump sum you could take out of your pension at age 55; you might even be enjoying it already! Since 2015, however, there have been extra options available for you when considering your next steps.
Traditionally, most people would have purchased an annuity. This involves using your pension pot (or part of it) to pay for a guaranteed income, either for a certain number of years or for life. Many people, however, now choose the option of pension income drawdown.
What is income drawdown?
The income drawdown option allows you to take money out of your pension fund without having to buy an annuity. Whether or not you’ve claimed your tax free lump sum cash, the money stays in your account and you can withdraw funds whenever you may need them. The great benefit is that your pension fund remains invested, which isn’t possible in an annuity. This means, of course, that your investment can continue to grow, and this may be a good option in the long term.
Another advantage is freedom. Like a bank account or other investment, you can take money when you need it. If you don’t, then it stays invested. This is particularly useful if you have another source of retirement income, or if you have taken out the lump sum. You can also organise withdrawing money from your pension to ensure you are not paying too much tax. If you reduce your income drawdown in some years, you can avoid having to pay the higher rate of income tax. Finally, you can always purchase an annuity later on if you decide that this is for you.
What to consider
It’s no surprise that, with all these advantages, income drawdown has become a much more popular option. However, it is worth pointing out that some providers have different rules for this. Some don’t offer pension drawdown as an option at all. If this is the case, you would need to consider whether transferring your money to a different pension provider might be a good idea.
There are clearly many benefits to pension drawdown, and many people will prefer it over an annuity. However, this does require careful thought during your retirement planning. This is especially the case if you are planning to take the 25% tax free lump sum cash. You need to ensure that there is enough money left in your pension pot to provide you with the income you need. You also need to be sure you want to continue to invest. Remember, the value of investments can go down as well as up and is not guaranteed.
Overall, income drawdown is potentially a great opportunity, but requires careful planning. An independent financial adviser will help make sure you get the very best out of your pension, and work out whether pension drawdown is the best way forward for you.