What is the Best Drawdown Pension in 2024?
Read our 2024 Best Drawdown Pension Guide, get advice on your retirement options and use our pension drawdown calculator to find out how much retirement income you could have...
The way pension drawdown works is relatively simple — at retirement you opt to designate your pension savings to drawdown.
Once the funds are in drawdown you can create your own flexible schedule of payments, either investing the capital to generate an income or withdrawing ad hoc lump sums as required (or a mixture of the two).
Moving the cash into drawdown is generally quite straightforward, but it’s vital you get the initial process right as this could have tax implications later on. In fact, the way pension drawdown is taxed is the most complicated part of taking your pension this way.
Income drawdown offers a far more flexible way of accessing your pension when compared to an annuity because it effectively allows you to dial up and down your pension income as required.
Also, once your savings are locked up in an annuity, there’s no chance for investment growth in the future. Pension drawdown could allow for that growth going forward.
With annuity rates currently at historic lows as a result of economic and demographic pressures increasing costs for annuity providers, income drawdown may also be able to offer you a larger pension than an annuity depending on your circumstances.
This additional flexibility is reflected in the name of all new pension drawdown contracts entered into since the April 2015 pension freedoms: they’re referred to as ‘flexi-access drawdown‘.
For the vast majority of people and pension schemes, you have to be 55 before you can access your pension in any way, including through pension drawdown.
There are a very small number of schemes that allow you early access (check with your pension provider for more on this) before the age of 55, but it’s highly uncommon.
If you’ve been diagnosed as severely / terminally ill and have a shortened life expectancy you may also get access to your pension early, although whether pension drawdown will be right for you in this instance requires careful consideration and a conversation with a qualified adviser.
To start you designate your pension — or part of your pension — into an income drawdown fund. You’ll then be able to keep your savings invested and create your own programme of lump sum and income payments from that fund.
You can treat your drawdown pension as a sort of ‘bank account’ and withdraw lump sums as required, or you can set up a regular payment to help meet your everyday financial needs in retirement. You can also mix these two options.
Whichever option you choose will affect the tax you pay on an income drawdown pension.
An uncrystallised funds pension lump sum (UFPLS), also known as a FLUMP, is similar to pension drawdown but is distinct in that it’s only available on uncrystallised pension funds (i.e. those not already in drawdown).
Instead, you withdraw lump sums direct from your pension pot as required. Each time you do, 25% of your withdrawal will be tax-free. Every 25% tax-free lump sum has to come with an accompanying 75% of taxable cash. So if you want £10,000 tax-free using a UFPLS, you’d also have to take a non-negotiable £30,000 of taxable cash.
UFPLS is slightly less complicated that income drawdown because you don’t have to find a drawdown provider and decide where you want to invest your drawdown fund.
However, not every pension provider will allow you to withdraw FLUMPs straight from your pension pot and there may be charges each time you do so.
Detailed below are a very simplified set of steps designed as a guideline if you’re considering flexi-access drawdown for your retirement income. The actual process of pension drawdown requires a great deal of consideration and financial planning in areas such as tax and longevity risk. That’s why we would always suggest your first step should be contacting a qualified pensions expert such as one of our experts here at Drewberry.
The Income Drawdown Calculator below can help you work out how long your drawdown pension might last given its size and the income you want in retirement, but it’s no substitute for speaking to an expert.
Available to most people with defined contribution pensions, pension drawdown allows you to leave your pension pot invested and take an income as necessary.
Not every pension provider will allow you to use income drawdown – you may have to transfer pension schemes to find one that does.
Also, different providers will offer different drawdown plans and investment options, so even if your pension provider does offer flexi-access drawdown it makes sense to look across the market to ensure you’re getting the best deal. Otherwise, you could incur unnecessary pension drawdown costs.
Our advisers are qualified to help you shop around for an income drawdown provider and are more than happy to provide you with assistance in this area.
Some older personal pensions are highly unlikely to allow you to use pension drawdown, including:
There is no limit to how much you can withdraw from new flexi-access drawdown plans, although withdrawals beyond the initial 25% of your pot will have tax implications. You could pay a great deal of tax if you access your pension all at once, so it’s not generally advisable to do so.
Still, with drawdown you’re free to take as much or as little as you like each year, which can be incredibly useful to help balance out your income to ensure it’s as tax-efficient as possible.
However, remember that your income drawdown pension is a finite pot. If you take too much out, your investments underperform or you simply live longer than you were expecting, then your pension could run out.
Tools such as our Pension Income Drawdown Calculator can help you understand how much you can withdraw each month to help mitigate the risk that your pension could run out early. They can also show you how long your pension will last if you take a certain monthly income.
For a truly accurate picture of your financial future as part of our financial planning service we use sophisticated modelling software to create your living breathing financial plan – read more
The tax implications surrounding flexi-access drawdown are the most complicated part of using this method to take your pension.
That’s why we’d always recommend you seek the help of a financial adviser who specialises in pension drawdown to navigate this area and ensure you don’t pay more tax than required on your pension.
Generally speaking, you can take up to 25% of your pension as a tax-free cash lump sum.
The remaining 75% of your pension is taxable at your highest marginal rate, regardless of whether you take a taxable income or withdraw taxable lump sums.
If you draw down a sum from your pension pot that pushes you up into a higher tax bracket, you’ll be taxed at a higher rate on the income that’s exceeded the lower threshold for that tax band.
If you withdraw your entire pension in one go, then you could face a hefty tax bill on the taxable 75% of your pot.
For those with large pension pots, withdrawing your pension all at once could put you in the higher (40%) or even additional (45%) tax bands.
As such, many people with larger pensions opt for gradual income drawdown, which is also known as phased income drawdown.
Here you shift your pension into drawdown slowly over several tax years to avoid a big tax hit on the taxable 75% of your pot. Each time you designate money from your pension as in drawdown, the first 25% of the sum is tax-free.
Ultimately, how much you’ll be taxed on your income drawdown pension depends on how much you take out of it and the way you take it. That’s why it’s important to create a personalised drawdown programme with an expert adviser who can help keep your tax liability on your pension income low.
This will involve putting together a financial plan for your retirement that will look at your finances in the round, not just your pensions, to see how much is affordable and tax-efficient to withdraw from your pension from year-to-year.
A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.
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