16/04/2021

Pension drawdown is a way of flexibly accessing a defined contribution pension at retirement. You shift your pension pot to drawdown, where it’s reinvested in funds designed to provide you with an income stream to live off in your later years.There are several names for pension drawdown:

Flexible drawdown
Prior to the April 2015 pension freedoms, flexible drawdown was one of two drawdown options available to you if you had an income and a pension pot over a fixed sum. Your other option was capped drawdown if you had a smaller fund, which limited how much you could take from your fund to mitigate the risk of it running out.
Flexi-access drawdown
After the 2015 pension freedoms, all flexible drawdown plans were automatically converted to flexi-access drawdown plans, which carry far fewer limitations on the income you can draw down from your pension. Those in capped drawdown could choose to remain in capped drawdown or move to flexi-access drawdown.
Income drawdown
Referring to the fact that with drawdown your pension pot stays invested and you live off the income those investments generate, as well as potentially taking out ad hoc lump sums as required.

How Does Income Drawdown Work?

The earliest you can access your pension is 55 with most defined contribution schemes (unless you have an earlier protected retirement age or are seriously ill).

When you decide to retire, you move your pension to drawdown where it remains invested. You’re entitled to take up to 25% as a tax-free cash lump sum from your pension at this point. Thereafter, all income you draw from the fund will be taxed as income at your highest marginal rate.

Is Pension Drawdown Right for Me?

Flexi-access drawdown is an inherently flexible way of accessing your retirement savings and has a number of benefits over other ways of accessing your pension pot.

However, despite these benefits, it’s not the best pension option for everyone. For those people who want a guaranteed, lifelong income there are still few alternatives to an annuity. There may be other reasons why drawdown isn’t right for you — to be sure, it’s worth speaking with a pensions adviser.

Advantages of Pension Drawdown

Ability to vary the amount you withdraw from your pension each year according to your needs, circumstances and tax situation
Nominate a pension successor — if you pass away before exhausting your drawdown fund, you can pass it on to someone of your choosing free from inheritance tax (providing it remains invested within the pension wrapper and hasn’t been withdrawn)
As your pension remains invested after retirement, there’s opportunity for investment growth in a way that isn’t possible with an annuity.

Disadvantages of Income Drawdown

There’s no income guarantee — if you take out too much, too soon in lump sums or income and / or your investments underperform, you could run out of money in retirement
The value of investments can fall as well as rise, meaning you could get back less than you paid in
Drawdown usually incurs fees and charges on the investments held within it, which you’ll have to pay as long as you leave your fund in drawdown
Once you take cash over and above the 25% tax-free cash lump sum, you trigger the Money Purchase Annual Allowance (MPAA), which limits the amount you can pay in to a pension in the future to £4,000 per year.

How Much Income Can You Take With Pension Drawdown?

This should be your foremost consideration if you’re thinking about pension drawdown — unlike an annuity, flexi-access drawdown offers you no lifelong guarantee of an income.

Our Pension Drawdown Calculator can give you an idea of when your income drawdown pension will run out, but it’s no substitute for the expertise of a financial adviser.

A pensions adviser can help put together a tailored schedule of payments from your drawdown fund, finding the best way to balance your need for income with longevity risk.

This will be to try and ensure you can live comfortably in retirement but won’t run out of cash too early.

Read more!

Comparing the Best Pension Drawdown Providers

Before you even see a penny from flexi-access drawdown, you’ll have to choose a drawdown provider. Not every pension provider will allow you to use income drawdown (although most modern self-invested personal pensions or SIPPs will). However, if yours doesn’t, you may have to transfer your pension to a provider that does.

Even if your pension provider will allow you to opt for drawdown to provide your pension income, there’s no guarantee that they will offer you the best pension drawdown deal in the market. As with most financial products, it pays to shop around.

There are a number of factors to consider when you compare flexi-access drawdown providers. Although pension drawdown is a fairly homogeneous product in terms of what it offers — a flexible way of accessing your pension — there are a number of different providers all with different propositions and different fees and charges.

The end result may be similar, but the way you access your pension and pay for pension drawdown could vary drastically between providers. That means finding the best income drawdown provider for you isn’t a one size fits all process.

What to Look for When Choosing Pension Drawdown

Will you have access to a good range of investment funds?
The whole point of flexible drawdown is that your pot stays invested. That means you want as many options as possible for you and / or your adviser to invest in.
Will it be easy to vary your income?
Another point of flexi-access drawdown is that it’s flexible. Not all providers will offer the maximum level of flexibility you might require though. Will it be easy to vary the payments you take and when you take them?
Can you access your drawdown account online?
Many people prefer the instant access offered by having their pension drawdown funds available to view over the Internet. Some providers will even offer a smartphone app. Online access also makes it easier to manage your pension 24/7.
Is your provider regulated by the FCA?
See the section on avoiding pension scams below, but it’s essential you choose a provider regulated by the FCA to ensure your retirement savings are held in a well-managed institution.
What will pension drawdown providers charge?
This is one of the biggest pension drawdown questions you should ask. There could be platform fees, management fees and an array of other charges, including potentially a charge each time you designate cash to drawdown.

The Costs of Pension Drawdown

There can be a huge array of fees, charges and other costs when setting up an income drawdown pension and drawing benefits from it, so it’s definitely worth comparing the various providers’ propositions to see which one will work out better for you.

These pension drawdown fees might include platform fees and management charges, as well as charges each time you actually draw cash. There may also be a fee for transferring your pension to that provider, so you’ll have to take that into account as well.

So when your adviser searches for the best pension drawdown provider for you, part of their job will be balancing the benefits of each provider with the fees you’ll be charged.

It’s rarely the case of simply picking the cheapest pension drawdown provider. While there are many excellent low-cost flexi-access drawdown options available, if they don’t suit your needs in other ways then choosing them purely on the basis of cost could be a bad choice.

John Spink
Head of Financial Planning at Drewberry

Compare Top UK Pension Drawdown Providers

Based on our research, below is a selection of the best UK income drawdown providers. However, this list is not exhaustive and there are many more options out there available on the market.

	Aegon Aegon’s UK operations are wholly owned and operated by Dutch life insurance, pension and asset management firm Aegon N.V. Aegon was formerly known as Scottish Equitable but, after Aegon N.V. increased its stakeholding to 100% of the company, Scottish Equitable eventually re-branded to Aegon in 2009. Its fees and charges are as follows: Administration charge: 0.6% on the first £29,999.99; 0.55% on £30,000-£49,999.99; 0.5% on £50,000-£99,999.99; 0.45% on £100,000-£249,999.99; 0% on sums over £250,000. Drawdown fee of £75 per annum applies once you start taking an income from the drawdown section of your pension.
	AJ Bell Youinvest AJ Bell Youinvest is the low-cost brand of pensions and investments firm AJ Bell. It’s SIPP permits drawdown directly from your pension fund and is subject to the following charges: Custody charge: 0.25% on shares (max. £25 per quarter); 0.25% on funds worth £0-£25,000; 0.1% on funds worth £250,000-£1m; 0.05% on funds worth £1m-£2m; 0% on funds worth over £2m. One-off payment of tax-free lump sum, income payment or small lump sum: £25 Regular income drawdown payments or regular pension lump sums: £100 per annum
	Alliance Trust Savings Alliance Trust was founded in 1890 and provides full SIPPs, as well as ISAs and investment dealing accounts. Alliance Trust SIPP charges are £17.50 a month (+ VAT) while you’re still saving which rises to £23.75 per month (+ VAT) once you enter the income stage (e.g. drawdown) A supplementary account charge of £375 a year (+VAT) may also apply.
	Ascentric Ascentric was formed in 2006. Royal London quickly acquired a majority shareholding in 2007, eventually going on to wholly own Ascentric by 2014. Ascentric is committed to offering simple pricing, a clear and transparent structure, no additional fees and one annual platform charge of: 0.3% on investments and cash up to and including £1m 0.1% on investments and cash from £1m-£3m 0.06% on investments and cash from £3m-£5m A minimum charge of £15 a month applies
	Bestinvest Bestinvest was founded in 1986. It provides execution-only investment services as part of the Tilney Group, including a low-cost SIPP. Tiered annual management charges: – 0.3% on the first £250,000 – 0.2% on funds of £250,000-£1 million – No charges on funds of over £1 million. Bestinvest doesn’t charge fees for entering into flexi-access drawdown, but there is a fee of £25 (+ VAT) on ad hoc income payments from your pension.
	Charles Stanley Direct Charles Stanley is a UK investment management company established in 1792, making it one of the oldest firms on the London Stock Exchange. It’s Charles Stanley Direct brand is its direct-to-consumer operation. Platform fees: 0.35% per annum (minimum payment of £24 and maximum payment of £240) on all stocks and shares 0.35% on funds worth up to £250,000; 0.2% on funds worth between £250,000-£500,000; 0.15% on funds between £500,000-£1m; 0.05% on funds between £1m and £2m; 0% on all funds worth £2m+. Each benefit crystallisation event in drawdown will be subject to a £150 charge There’s a £200 charge for full withdrawal of your fund within 2 years of opening a SIPP account.
	Fidelity Fidelity International was founded in 1969 as the international arm of Fidelity Investments, a financial services corporation based in Boston, Massachusetts. It became independent from Fidelity Investments in 1980. Investments of below £7,500 carry an annual service fee of £45 if you don’t have a regular savings plan or 0.35% if you do. Between £7,500 and £250,000 Fidelity charges 0.35% For investments of between £250,000 and £1 million the fee is 0.2%. No further service fee is levied on assets above £1 million. Fidelity charges no specific fees for moving pension savings to drawdown or withdrawing funds from drawdown.
	Hargreaves Lansdown Based in Bristol, Hargreaves Lansdown was founded in 1981. It offers ISAs, pensions, investments, financial advice and share dealing services. Hargreaves Lansdown SIPPs carry a tiered fee structure of: 0.45% on the first £250,000; 0.25% on portfolios worth between £250,000 and £1 million; 0.1% on portfolios worth between £1 million and £2 million; no fee for portfolios worth over £2 million. There’s no charge to set up drawdown and you can start, stop or change your income withdrawals whenever you want, without charge.
	Rowanmoor Rowanmoor is the UK’s largest independent small self-administered scheme (SSAS) provider and a provider of bespoke self-invested personal pensions (SIPPs). Setup fees for Rowanmoor’s SIPP are £300 for the full investment option and £100 for the single investment option. Annual administration fees are £495 for the full investment option and £250 for the single investment option. To ensure fees are paid in a timely manner, Rowanmoor requires you to hold at least £2,000 in cash, or other easily realisable assets, to meet any liabilities. There are a number of fees associated with Rowanmoor’s SIPP, including: £105 for arrangements to pay a pension commencement lump sum £130 to set up drawdown £150 per annum for regular payment of pensions £125 per adjustment to adjust the level of regular payments £250 per payment to make an ad hoc payment from an existing drawdown arrangement.

Read more!

Choosing the Best Income Drawdown Investments

A big part of opting for pension drawdown is the fact that your pension remains invested in retirement. As such, you need to be sure you’re choosing the best investments for your circumstances.

An adviser will also be able to discuss with you your appetite for risk and, given that, steer you towards the better pension drawdown investment options for you.

At the most conservative end of the scale would be investments in cash and government gilts. These are among the safest investments around but the fact that there’s so little risk involved also means that, in today’s low-rate environment, there’s also very little reward. However, if you’re not comfortable with investment risk this may be the best option for you.

More adventurous investors would likely hold a larger proportion of their fund in dynamic assets such as equities, i.e. stocks and shares. However, there is more risk of volatility with equities that not everyone is happy to take on.

Other options include corporate bonds and commercial property, while you can also invest your assets in funds such as unit trusts or investment trusts.

Avoiding Pension Scams

The freedom and flexibility introduced by flexi-access drawdown has benefitted many people, but unfortunately pension fraudsters have taken advantage of growing consumer awareness of pension drawdown and put together scams to con you out of your retirement savings.

Pension fraud might include promises to unlock or release your pension, especially before the age of 55. While this might sound similar to legitimate pension drawdown, it’s actually very different.

This is particularly true if you look to access your pension before the age of 55, which is almost never possible unless you’re severely or terminally ill.

While a small minority of historic pension schemes allow you to start drawing your benefits before the age of 55, this doesn’t apply to most active schemes. If you’re wondering if this applies to you, it’s easy to find out with a simple phone call to your pension provider. It’s vital you get confirmation this is the case first before you act.

One basic question to ask yourself is this: Does it sound too good to be true? If so, as with most areas of life, it most likely is.

Accessing your pension early, before the age of 55, will almost always be classed as an ‘unauthorised withdrawal’ by HMRC unless you’ve been given special permission because your life expectancy is severely compromised.

As such, HMRC will most likely slap you with a 55% charge on your withdrawal. That’s before you’ve even paid the often steep fees pension scammers usually levy on the whole process.

Also, promises of ‘guaranteed returns’ should ring alarm bells. All investment carries risk and your fund could always go down as well as up. While there are cautious portfolios designed for those who dislike investment risk which aim to minimise the risk of loss as much as possible, there are no definitive guarantees.

If you’re promised guaranteed returns that seem extremely high — e.g. in double digits — be extra cautious.

Drewberry’s Top Tips to Avoid Pension Fraud

Check the FCA register
The Financial Conduct Authority publishes a register of all authorised financial services firms in the UK, which also includes companies previously reported to the FCA for involvement in illicit activity
Beware cold calls
Drewberry will follow up with a phone call if you leave your details on our website and announce who we are, but if you receive a phone call out of the blue from a company you’ve never heard of or interacted with promising easy access to your pension, the best thing to do is hang up
Check the company’s address
Go online and check the company’s online presence and see if it offers a physical address. Even if it does offer a physical address, check that address — is it an office or simply a provider of PO boxes?
Make sure you can call the company back
If a company won’t accept an inbound phone call from you, ask yourself why. No legitimate firm doesn’t have an inbound phone service set up. At Drewberry, you can call us on 02084327333 during office hours to discuss your pension needs
Don’t be rushed into a decision
You should be able to take as much time as you’re comfortable with when deciding what to do with your pension. It’s a major financial decision and no genuine company will attempt to rush you into making a decision. Common tactics include sending a motorbike courier to your door with papers to sign on the spot
Pension drawdown doesn’t let you unlock your pension before age 55
Don’t be drawn in by a company promising to give you access to your pension before the age of 55; this is never possible unless you’re terminally ill or are one of a very small number of people who are permitted to draw benefits from their scheme early
There are no loopholes
No matter what you’re promised, there are no loopholes or any other means of unlocking your pension early unless you’re seriously / terminally ill
Contact the Pensions Advisory Service
If you’re being pestered with phone calls about your pension and are concerned, the Pensions Advisory Service can help.

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