Since pension regulations changed in 2015 and pension freedoms were introduced, it has been possible to withdraw up to 25% of your pension pots as a tax-free lump sum plus giving you options to withdraw your funds when you need them, instead of the traditional route of an annuity which gives you an ongoing regular income.
Many people have found pension drawdown a very attractive option. Pension funds try to make pension drawdown easy to manage and allow people to take chunks of their funds when they please or need a capital sum for a purpose like paying off the mortgage.
Before you go ahead with this withdrawal, however, it is important to ensure that you fully understand the consequences of your decision and the possible drawbacks that you could suffer from pension drawdown.
Many people who go for the drawdown option, do not shop around and stay with their current pension provider, but it could be beneficial to look at what the market has to offer before you start down the pension drawdown route. Remember too that you will have to pay income tax on any money (except your tax-free lump sum) that you withdraw from your private pension, whether you choose drawdown or an annuity.
In our opinion, you should always take advice from a financial adviser who is authorised and regulated by the Financial Conduct Authority before you make your decision, and when you do so there are five important questions you should ask.
1.) How much will my provider charge me for taking money out of my personal pension?
Small differences in withdrawal costs and charges can make a significant difference to your personal pension in the long term, particularly when you think that your pension funds could last 30 years or more. Plus, with pension drawdown, your pension funds are still invested. Your pension provider will charge you a management fee to keep your pension invested, so it’s worth checking that you’re getting the best deal.
2.) How secure is the pension fund that is investing my money, and am I happy with the level of risk?
Your pension fund should always be aligned to your attitude to financial risk. By taking pension drawdown, your funds are still invested and may continue to grow. Taking too little risk and the fund may not grow and just be whittled away with management fees from the pension provider, but too much risk and you could potentially lose your money if the markets take a steep drop.
3.) How often can I take my money? Are there any restrictions?
Although you may think that with drawdown you can take your money as and when you need, it’s worth remembering that the pension funds are still invested. Your pension provider will need to disinvest your investments, meaning, there may be restrictions on the value and regularity that you can take your money.
4.) Is drawdown the right decision for me, or should I stick with an annuity? Could I have a hybrid set-up, combining the two?
The answer might well depend on what sort of person you are and how happy you will be to live with risk. Speaking with an independent financial adviser could help you come to the right decision for you.
5.) What rate will my pension grow at and would a different provider give a better return on my investment?
As you’ve invested in your private pension over the last 20 years, different pension providers offer different management fees and growth levels. It is the same when your pension is in drawdown, different pension providers will charge you different management fees, so it’s worth shopping around to get the right deal for you.
Since everything depends on the health of investments, nobody can be certain of what the future might bring, and you do need to think about the possibility of falling markets. If the losses were heavy in the early years, that could reduce your ability to fund your retirement later. Taking your pension in cash also means that your money will be vulnerable to inflation.
To get free, impartial advice on income drawdown or annuities, contact us today on 0808 164 2664. Or, to find out more about Pension Works, click here.