Understanding the risks of pension income drawdown

Drawdown – Understanding The Risks, Advice Is Essential

We’re sure you’ve heard the term pension drawdown; this is where you leave your pension fund invested and take income as and when you need it, instead of using the cash to buy an annuity as people did traditionally. As the money remains invested, the pension fund can continue to grow, even when you’ve retired.

Since pension reforms, introduced in 2015, more retirees have opted to take this more flexible option with their pensions, and the Financial Conduct Authority has reported that drawdown has become much more popular, with twice as many people moving their funds into drawdown rather than an annuity.

Risks associated with Pension Drawdown

While drawdown offers excellent flexibility, there are risks that you need to be aware of. Unlike an annuity, the amount you could draw as income isn’t guaranteed. Your pension fund remains invested which means that you are exposed to share price movements as markets rise and fall.

The volatility makes it even more important to take good independent professional advice. Without it, you could find your income level, and you might even risk running out of money at some point.

In drawdown, there are risks involved both in taking out too little and too much. If you draw too little you might not have sufficient to cover your living expenses, taking out too much could have tax implications and restrict your remaining pension pot’s ability to provide an income throughout your retirement. A financial adviser can provide valuable input, helping you plan your drawdown strategy and ensuring that it’s kept under regular review.

Consider an annuity

Although it’s no longer obligatory to take an annuity at retirement, they still have benefits to offer. It is possible to put a portion of your pension pot into an annuity to provide a regular guaranteed amount for the rest of your life. Some people choose to do this to ensure they cover their core living costs.

Seek professional drawdown advice

To get free, impartial advice on Pension Drawdown, contact us today on 0808 164 2664. Or to find out more about Pension Drawdown, click here.