How does pension drawdown work?
Pension drawdown was first introduced in April 2015 and allows you to invest your pension savings and draw an income from them when it suits you. You can either use pension drawdown to take a regular income from your pension, or you can use it to take ad-hoc payments when you need them.
Can you use pension drawdown with any type of pension?
No, pension drawdown will only be an option for you if you have a defined contribution or money purchase pension and you’re aged 55 or over (rising to 57 in 2028). If you belong to a final salary or defined benefit pension, you’ll receive a guaranteed income in retirement. This income will be based on your salary and the number of years you contributed to the scheme.
Main benefits of using pension drawdown
One of the biggest benefits of pension drawdown is that you can access your pension savings as and when you need to. So, for example, you might decide to take some money out to bridge any income gap you might have until you start receiving the state pension, or you may choose to access some funds to make home improvements, or to pay for holidays. You can then take out less in later years when perhaps your outgoings might be lower. Another major advantage of drawdown is that when you die, any retirement savings that you haven’t used.
What are the downsides?
If you’re using drawdown, you’ll need to be careful you don’t take too much out of your pension pot too soon, otherwise you might find you run out of money. You must also remember that as your pension savings remain invested, there’s a risk that your investments might not do as well as you hope, leaving your with less to draw on. If your investments don’t perform as well as you expect, you might have to adjust the amount of income you take. It’s therefore important to regularly review how your investments are doing.
Is income taken via pension drawdown taxed?
If you just take your tax-free cash from your pension, then you can continue to contribute up to £40,000 into your pension each tax year. However, once you start drawing money from your pension other than your tax-free cash, a lower £4,000 annual allowance applies.
Can I carry on paying into my pension once I've started drawing money from it?
It’s essential to understand all the different ways you can use your pension to provide you with an income before you decide which one is right for you, so if you’re unsure how to proceed you should seek professional financial advice. Profile Pensions is authorised and regulated by the Financial Conduct Authority and our advisers are obliged to give you advice that’s in your best interests, based on your individual circumstances. Contact us if you would like help understanding your pension and your options in retirement.