What is Drawdown?
When the time comes to use your pension, you can choose to put some or all of your retirement savings into a drawdown scheme, rather than purchasing an annuity that gives a guaranteed income. A drawdown scheme allows you to leave your pension funds invested; you can get access to some or all of them when you need to spend the money. This is known as Flexible Access Drawdown (FAD). Unlike with an annuity, the money remains yours. You’ll pay annual charges on the amount of money that remains invested.
Pension Drawdown video transcript:
Hi, I'm Michelle Gribbin, Chief Investment Officer at Profile Pensions. We know that pensions can be complicated to understand so we've put together some impartial videos to help answer some of the most common customer questions.
Pension drawdown is one of the most common terms in terms of pensions. So what is pension drawdown? So pension drawdown is about how you draw your income from your fund. So you've got lots of choices as to how you take the monies from your pension.
You can either take a regular income, or you can take a series of ad-hoc withdrawals. So for example, it may be that you take a tax free cash lump sum at age 55, and then leave the rest of your monies to be invested and benefit from the growth of the fund. So up to 25% of the fund, you can take tax free and the rest is taxed at your marginal rate. So if you are still working when you decide to take monies from your fund, that means the monies will be added to the rest of your income and taxed potentially at a higher rate.
The key thing to remember is to make sure your fund lasts you throughout your retirement. The average life expectancy for a man is 79, and for a woman it's 83. So that means, if you start drawing your pension at 55, those monies if you're a man need to last for 24 years, and for a woman for 28 years. So we need to take those factors in to account when planning how you take the monies from your pension.
When looking at your pension options the key consideration is taking impartial pension advice to help make sense of all the options available to you.