Pension drawdown is a way of taking your pension in retirement. You move your pension to a drawdown fund but leave it invested, taking income and lump sums as required to fund retirement.
This is opposed to other main method of securing a retirement income: buying an annuity. Here, you swap your pension pot for an income for the rest of your life.
With drawdown, as your pension remains invested in retirement this leaves open the possibility of investment growth in your later years. Of course, the flipside of this is that the value of your investment could fall as well as rise, meaning you could get back less than you invested.
While drawdown offers enhanced flexibility, the investment risk means that it may not be suitable for those who need a regular retirement income and for those with smaller pension pots, who tend to be at higher risk of the fund running out in retirement. Furthermore, no matter what the pot size, if you take too much out of your pension or your investments underperform, you also run the risk of your fund running dry before you pass away.
Thanks to the April 2015 pension freedoms, which opened up the option of flexibly drawing down your pension to far more people, it is likely most people with defined contribution pensions will be able to use pension drawdown.
Before pension freedom there were a number of restrictions preventing people using fully flexible drawdown, but these were lifted in April 2015.
That means that today far more people can use income drawdown to access their pension with huge flexibility and can create their own programme of lump sum and income payments in retirement to suit them.
Most modern self-invested personal pensions or SIPPs will allow you to use pension drawdown, as will some other types of defined contribution pensions. However, there’s no guarantee this is the case and the best way to find out is by asking your pension provider.
With certain older pensions, it’s very unlikely you’ll be able to use pension drawdown. Such plans include:
The best way to find out whether you’ll be able to use pension income drawdown is to ask your pension provider — they’ll be able to point you in the right direction.
Although the pension freedoms gave most people the option to draw down your pension, they didn’t force every money purchase pension provider to offer pension drawdown. For many older schemes it’s simply not possible, and even funds that do allow income drawdown may have rules restricting its availability and your ability to access it.
Some may only allow partial flexi-access drawdown, while others could have rules imposing minimum fund sizes before they’ll allow you to make use of pension drawdown. Again, the best way to find out is to enquire with your provider.
If your current provider doesn’t offer pension drawdown then it’s possible transfer your defined contribution pension to a plan that will.
However, if your pension provider has said you need to have a minimum fund value before you can use drawdown then it could well be in your best interest, because those with smaller pension pots are at risk of their pension running out with income drawdown. You’ll have to consider whether drawdown is right for you if this is the case.
To assess how likely it is your pension will run dry, you can check your risk with the Drewberry Pension Drawdown Calculator, which can help you better manage your pension withdrawals.
Essentially, no. If you have a final salary or defined benefit pension, you won’t be able to take advantage of the new pension freedoms.
Defined benefit pensions are a promise to pay you an income for the rest of your life after you retire — there’s no pot of money you’ve been saving into over your working life as with a defined contribution scheme.
Final salary schemes have a number of benefits, including:
However, some people would still prefer to be able to draw down final salary pensions in the same way they could a defined contribution pension rather than receiving a fixed income.
This could be to benefit from greater tax advantages, both during your life and when your loved ones inherit your pension after your death, or simply a desire to manage your own portfolio and with it your retirement future.
While you can’t take advantage of income drawdown with a final salary scheme as the scheme stands, there is an option to consider known as a final salary pension transfer.
Here your pension fund offers you a cash lump sum invested in a defined contribution plan in exchange for you giving up your guaranteed lifelong income. These lump sums providers are willing to offer are known as cash equivalent transfer values.
However, a final salary pension transfer is unlikely to be right for most people — the majority of pensioners will be better off staying in their final salary scheme, even given the potential benefits of income drawdown.
If your final salary pension is worth more than £30,000 you’ll be required to seek professional advice. This said, we always recommend seeking advice on something as complex as a final salary pension transfer, regardless of the size of the pot.
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