Pension drawdown — also known as income drawdown and flexi-access drawdown — is a way of turning your pension savings into retirement income that sees your pension remain invested throughout retirement.
When you retire, you move your pension pot to a drawdown fund, at which point you’re entitled to take up to 25% of the pot as a tax-free cash lump sum if you want to.
Income drawdown offers you a wide choice of pension investments at retirement. The main attraction of using flexi-access drawdown is that your can invest your pension for the rest of your life if you see fit, potentially benefiting from investment growth over the long-term.
If your main aim is investing your pension to achieve growth, income drawdown compares favourably with other ways of accessing your pension pot, such as an annuity, where there’s no chance of your fund increasing in line with markets in the future.
Of course, the value of investments can fall as well as rise, meaning you could get back less than you invested. This is something you need to be aware of when considering drawdown for your retirement.
Where to invest your drawdown pension pot is an incredibly important question you’ll need to consider — this guide to pension investing should provide you with some help.
If you’re considering drawing down your pension to fund your retirement, you’ll need to consider the best way to invest your pension pot for your circumstances.
Pension drawdown means your pension fund stays invested throughout your retirement and has opportunity for investment growth long after you make your first pension withdrawal.
Clearly some investments are riskier than others. These riskier investments do tend to offer the potential for higher returns, but that also means there’s room for more significant losses as well.
Such investments can be volatile, with a lot of ups and downs. It may be that safer investments will suit you better, as there is a lower risk of loss. This could particularly be true if you have a smaller pension pot.
Ultimately, how you invest your income drawdown pension will be determined by your appetite for investment risk, which will be determined by a number of factors, such as whether you have any income elsewhere (and whether this income is guaranteed) and how much money you’re planning to draw down from your pension.
You’ll also need to consider your life expectancy as this will cover how long you’ll be drawing on your pension for. With income drawdown there’s a chance you might outlive your pension and exhaust your pot before the end of your life.
Our Pension Drawdown Calculator can provide you with an estimate of how long your pension might last given the size of the pension and how much you’re planning to draw each month.
You have a number of options for investing your pension fund. The main asset classes usually held as pension investments can include:
Not every pension provider or type of pension will permit investment across all these types of assets, while there are also assets not listed above that you might consider investing in after taking stock of your needs and circumstances.
Alongside choosing assets, you may also need to choose which geographic areas you’d like your investments to represent (e.g. UK, European, US, Asian and emerging markets etc.). This can be daunting, which is why it pays to have an expert in your corner.
Diversification is incredibly important when it comes to investing your pension. It’s true what they say: Don’t keep your eggs in one basket.
Jonathan Cooper
Senior Paraplanner at Drewberry
As time goes on, your needs will inevitably change. If you access your pension at 55, the earliest age at which you can do so, it should be no surprise that the investments you choose then are unlikely to still suit your needs 20 years later at 75.
A regular pension review will ensure you’re still comfortable with the level of investment risk you’re taking. Ideally, you’d do this at least on an annual basis.
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Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey
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