Pension drawdown is now open to more people than ever before thanks to the 2015 pension freedoms. Today, you can take your pension via income drawdown with full flexibility — hence the new name of flexi-access drawdown — regardless of the size of your pension pot(s).
If you decide to use income drawdown to fund your retirement, it’s better to compare providers first to find the best drawdown pension for you, not least because the fees providers charge for pension drawdown can vary considerably.
Separately, you’ll also need to consider other income drawdown costs, including the tax implications of pension drawdown.
When all this is combined, it’s clear to see why it is so important to know exactly how much you’ll pay to use income drawdown at retirement and beyond.
There are a number of income drawdown fees, costs and charges to consider.
The entire idea of flexi-access drawdown is that your pension pot stays invested throughout your retirement, leaving plenty of opportunity for your pension to grow over the years.
To achieve this growth your fund will need to be managed on an ongoing basis, so the investments funds you hold will usually levy fees for the service they’re providing.
There may also be other income drawdown fees, such as:
The amount you’ll be charged to use pension drawdown generally depends on the size on your pension pot, as it will be a percentage of the funds you hold. This percentage may fall as the size of your pot increases, although that’s not guaranteed.
There can be big variance in the fees that pension drawdown providers will charge for their services, which is why it pays to shop around and be an informed consumer.
Don’t simply opt to use the flexi-access drawdown option offered to you by your current pension provider without first checking whether they’re offering the best drawdown deal for you.
It’s also important to realise that some providers might charge you each time you move money from your pension into income drawdown. If you’re considering drip-feeding money into drawdown gradually over time to benefit from maximum tax efficiency, this could take a considerable bite out of your pension savings.
An annuity is usually a cheaper option than pension drawdown and perhaps therefore seems like a better option because you won’t face ongoing charges. Upfront fees are also generally lower when you buy an annuity.
However, the ‘cost’ of buying an annuity is that your income remains fixed for the rest of your life (unless you’ve chosen an index-linked annuity, which will rise in line with inflation, but at the price of a smaller yearly payment to start with).
An annuity offers no opportunity for investment growth, so your retirement savings will never get any bigger than they are on the day you decide to take them.
On the other hand, £100,000 left untouched for 10 years that achieves a modest growth rate of 2% each year would grow to £122,119.94.
As you can see, swapping your entire pension pot for a fixed annual income in the form of an annuity could mean you miss out on any growth that might be achieved from having your pension invested in drawdown.
As with any financial product, it pays to shop around for your income drawdown provider to make sure you’re getting the best deal. We’re all used to shopping around for our car insurance and even personal loans or credit cards, so it makes no sense to hesitate when it comes to shopping around for your pension, likely the biggest financial decision you’ll make in your life.
When you compare income drawdown providers to try and find the best retirement option for you, it’s important to consider:
When you’re comparing and contrasting drawdown providers, be careful to steer clear of pension scams. You need to make sure you’re putting your money into a legitimate drawdown scheme and not investing with pension fraudsters, which could see you losing your hard-earned cash.
Drewberry is on the Financial Conduct Authority’s Financial Services Register — check this list for the name of any firm you’re considering investing with to make sure it is as well.
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