The 2015 pension freedoms made it possible to flexibly access your defined contribution pension via income drawdown. Drawdown involves withdrawing your pension on your own schedule of lump sum and income payments as and when you need to.
At retirement — typically age 55, with very few exceptions — you move your pension to a drawdown fund. That money is reinvested in a way that’s designed to provide you with an income stream for your later years. You can make withdrawals from this as you see fit to fund retirement.
It’s a potential alternative to the other main way of securing a retirement income, an annuity. With an annuity, you exchange your pension pot for a guaranteed income for the rest of your life, no matter how long that might be.
The short answer is no. There’s no obligation to take financial advice before you start drawing down your pension, assuming you’re already in a money purchase or defined contribution scheme.
In fact, according to data released by the Financial Conduct Authority, in the 6 months to March 2018 31% of people who accessed their pension via drawdown did so without regulated advice.
However, although getting advice for pension drawdown isn’t mandatory, there are a number of risks involved with not doing so. These include:
Using a financial adviser for income drawdown provides guidance on where to invest your pension pot for optimum growth while still meeting your appetite for investment risk. It may also be valuable to get flexi-access drawdown advice when it comes to reducing the chance you’ll face a pension shortfall in the future, as an adviser can put together a payment schedule.
Again, it is possible to access pension drawdown with no advice providing you have a defined contribution pension. This said, doing so could prove to be an expensive mistake if you’re not sure what you’re doing and aren’t sure how to invest your pension.
When you choose pension drawdown, there’ll be a lot to consider. This is where many people find the expertise of an adviser useful. Decisions you’ll have to make include where you’ll invest your fund, which might be in asset classes such as:
You also generally have the option to use unit trusts or investment trusts, which offer access to a whole array of shares, bonds or both via one single investment (i.e. in the trust).
Unit trusts and investment trusts generally specialise in certain geographic areas (e.g. the US, the UK, emerging markets, Asia etc.), so you could find yourself needing to brush up on your knowledge of global investment markets to see if they’re appropriate for your retirement fund.
As mentioned, your pension pot in drawdown is a finite amount, so it could run out if you take too much out and don’t take into account longevity risk.
Another aspect to think about is whether you want to take your 25% tax-free cash entitlement upfront or gradually drip feed your pension into drawdown over time. This may impact how much tax you pay on your drawdown pension.
Gradual or phased income drawdown lets you take the 25% tax-free cash component in smaller tranches and can be more tax-efficient, but this depends on your circumstances. An adviser can discuss the ins and outs of the pension tax rules with you to ensure you’re drawing down your pension in the most tax-efficient way possible for you.
Income drawdown sees you take on all the investment risk yourself, so for most people it makes sense to use a financial adviser such as those on the team at Drewberry to manage your pension pot.
Head of Financial Planning at Drewberry
An expert pension adviser is best-placed to put together a drawdown program that may help reduce the risk of your pension running out early. However, for a rough idea of how long your pension pot will last, the below Pension Drawdown Calculator can help.
Flexi-access drawdown has only been available since 2015; before this, not everyone could access their pension with full flexibility. That means that there’s much in the way of statistics regarding how advised vs. non-advised pension drawdown funds have performed over time.
However, there’s a lot of evidence that financial advice in general can have a significant positive impact on wealth. Studies have indicated that people who take financial advice can be around 50% richer than those who don’t.
Often, the expertise of an adviser can help you steer clear of what’s known as ‘pound cost ravaging’.
This can happen if you take out too much money from your pension early on and then the markets experience a downturn, cutting the value of your remaining investments. Due to the sizeable withdrawals you’ve already made, there may not be enough funds left in your pension pot to rebuild after this loss and you could face a leaner retirement.
Over time, good financial advice should in theory more than pay for itself by hopefully providing improved investment performance and potentially preventing unwanted losses. What’s more, with someone else making the hard decisions, it could also help you sleep at night!
Head of Paraplanning at Drewberry
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