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Advantages and disadvantages of pension income drawdown

Advantages and Disadvantages of Pension Drawdown

Pension drawdown offers you the freedom to access your pension as and when you choose. Draw down provides you with the flexibility to draw funds from your pension as and when you require in the form of lump sum and income payments.

The extra flexibility now offered by drawdown pensions has seen these new-style arrangements renamed as flexi-acess drawdown. Many people have already benefited from these contracts since they were introduced in 2015 – and many more people will likely enjoy the benefits of income drawdown going forward.

However, just as with every aspect of life and financial planning, you need to consider both the pros and cons of drawing down your pension to make an informed decision about whether pension drawdown is right for you.

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What is Flexi-Access Drawdown?

The pension freedoms opened up income drawdown to a far wider number of people with defined contribution pensions than was ever the case previously, removing the need to purchase an annuity if that’s not what you wanted to do.

Once you hit 55 – unless you can retire early, perhaps because you qualify for an ill health pension or have a protected scheme retirement age for instance – you get access to your money purchase retirement savings and are allowed to draw down your pension.

What is pension drawdown?

Pension income drawdown effectively lets you treat your pension pot like a bank account, offering the ability to fund your retirement by:

  • investing your pension savings to generate an income
  • withdrawing lump sums as required
  • any combination or the above.

Before you start drawing down your pension, you’re usually entitled to take up to 25% of your pot as a tax-free lump sum, known in the business as a pension commencement lump sum (PCLS).

You don’t have to take the entire 25% upfront, nor do you have to move your entire pension to drawdown at once – you can do so gradually, spreading out your drawdown pension benefits over time.

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Benefits of pension income drawdown

What Are the Advantages of Income Drawdown?

  • Access to tax-free pension cash – either immediately upfront or in tranches as you draw down your pension
  • Tax-free lump sums don’t trigger the money purchase annual allowance (MPAA) – if you only take the 25% tax-free cash from your pension, you can still continue to contribute your maximum annual allowance until you start drawing income
  • Flexibility – vary your drawdown income up and down in any given tax year to help control the amount of tax you pay
  • Opportunity for growth – as your pension stays invested after retirement, it has the chance to continue growing benefits of pension income drawdown
  • Investment control – depending on your provider, you’ll likely have access to a wide range of investment options
  • Tax-free investment growth – all funds that remain invested in a pension or a drawdown fund retain tax-free investment returns
  • Favourable inheritance rules – pension drawdown allows you to pass on any funds still invested free from inheritance tax, which is often easier than passing down annuity income
  • No need to lock in an annuity at today’s low rates – although you can still buy one later if you want or need to (and using pension drawdown in the meantime may give time for annuity rates to improve).
 

Pension Income Drawdown Calculator

When will your income drawdown pension run out? Enter the anticipated size of your pension pot at retirement and follow these easy steps to calculate how long your pension will last. You'll receive our FREE Income Drawdown Downloadable Guide.
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Warning: As your pension fund value exceeds the Lifetime Allowance of £1 million you may be liable for a lifetime allowance tax charge. Please contact one of our financial advisers to discuss how you could potentially mitigate this liability.
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You've chosen to take more than 25% of your pension pot upfront as a cash lump sum. Only the first 25% of your pension pot can be withdrawn in this way tax-free. Anything above the initial 25% will be subject to income tax at your highest marginal rate.
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Your Income Drawdown Results

Pension Drawdown Overview

Monthly income to age
(-10 years)
Monthly income to age
(chosen age)
Monthly income to age
(+10 yrs)
Funds Exhausted
Conservative Growth Rate 2%
Expected Growth Rate 4%
Accelerated Growth Rate 6%
(1) Our drawdown calculator is limited to 115 years old and at this age you will still have funds available. It is important to bear in mind that if your pension fund grows to exceed the Lifetime Allowance of £1 million you may be liable for a lifetime allowance tax charge. Call us on 02084327333 to speak with one of our financial advisers to discuss how you could mitigate this liability.
Neil Adams - Final Salary Pension Expert

These calculators help but sometimes it doesn't beat talking to a human. If you need any support please do not hesitate to pop us a call on 02084327333.

Neil Adams
Head of Pensions Advice at Drewberry

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drawbacks of pension income drawdown

Are There Disadvantages to Pension Drawdown?

Peter Banks, Wealth & Pensions Expert at Drewberry, can offer drawdown advice

It’s important to realise that, as with any part of life, there may be some drawbacks to pension drawdown as well as many benefits.

That’s why getting expert advice can be so beneficial, as an adviser can help you steer clear of some of the pitfalls you might face, such as taking too much income and running out of money before the end of your life.

Peter Banks
Wealth & Pensions Expert at Drewberry

  • Your drawdown fund could run out – if you take too much money or your investments underperform you could run out of cash (using our Pension Drawdown Calculator can help address this risk)
  • An annuity is a guaranteed income for life – this isn’t the case for pension drawdown
  • You’ll take on all the investment risk – getting a pensions expert to build you a balanced drawdown portfolio suited to your needs and risk appetite could help reduce the chance your investments will perform poorly
  • Keep a close eye on your taxes – a financial professional can help you manage your drawdown income to ensure you don’t overpay tax on pension withdrawalsdisadvantages of pension drawdown
  • Beware the pension lifetime allowance – even if your pension is below the lifetime allowance when you retired, excellent investment performance could push you above your cap by the time you’re assessed for the lifetime allowance at age 75
  • Fees and charges – depending on your pension provider, there may be more fees and charges for pension drawdown than for an annuity
  • Very small pension pots aren’t well-suited to income drawdown.

Getting Expert Pension Drawdown Advice

An expert pensions adviser can help you weigh up the benefits of pension drawdown and any potential drawbacks you might face if you choose to fund your retirement this way.

Although income drawdown isn’t the best pension option for everyone, in many cases getting professional advice can help cut some of the downsides that can arise if you opt for drawdown.

An adviser can be particularly valuable when it comes to helping you construct a balanced drawdown portfolio to boost the resilience of your pension investments against market downturns, as well as managing your pension withdrawals to ensure you’re not taking too much cash.

I’ve helped many clients set up drawdown portfolios based on their investment risk profile and income needs in retirement.

The team here at Drewberry can help you through this process as well – just pop us a call on 02084327333 to discuss your needs.

Neil Adams
Pensions & Investments Expert at Drewberry

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