Is Pension Drawdown a Good Idea?

Your Financial Plan
13/06/2022
15 mins

Pension drawdown was opened up to a wider number of people following the 2015 pension freedoms. However, it can seem complicated at first glance.

What Is Income Drawdown?

It is a way of taking your pension savings after retirement while keeping them invested in the markets, leaving the potential for investment growth in your later years.

Drawdown also allows you flexibility with your pension income, allowing you to dial up and down the income you draw from your pension as you see fit. This can allow you to better manage your tax situation, for example, by adjusting your income in any given year to suit your needs and circumstances.

Since the pension freedoms, it’s been relabelled as ‘flexi-access drawdown’ to take into account just how much more freedom the new pension drawdown rules offer.

Yet while this freedom might sound tempting, there are a number of factors to consider that will help you decide whether income drawdown is a good idea for you. Income drawdown won’t be right for everyone — which is why it always pays to get pension advice to check whether drawdown will be suitable for you.

Is Income Drawdown Right for Me?

Ultimately, the best way to check if pension income drawdown is right for you is to ask a pension adviser. However, broadly speaking, pension drawdown could be a good fit for you if:

  • You want your pension pot to stay invested and therefore still have a chance to grow even as you draw from it
  • You like the idea of continuing to manage and optimise your pension investments after retirement
  • You have income from other sources and want your income drawdown pension income to be variable so it’s as tax-efficient as possible
  • You don’t need a fixed regular income from your pension
  • You want to keep your options open — you can always use income drawdown first and buy an annuity later if you feel that’s best for you, but you can’t buy an annuity first with your entire pension pot and then switch to drawdown.
  • You want to pass your pension savings down to your loved ones.

Find > Organise > Simplify

Take Control Of Your Financial Future
See Your Financial Future

Advantages of Pension Drawdown

Many welcomed the introduction of flexi-access drawdown because it offered more people far more freedom when it came to how they took their pension pots.

Before 2015, fully flexible drawdown was only available to those with a guaranteed retirement income elsewhere of £12,000 — otherwise, you had to choose capped drawdown, which placed a strict limit on how much you could take from your pension.

Following the pension freedoms this changed and the benefits of pension drawdown were made available to all.

Drawdown Pensions May Offer Investment Growth

A key benefit of flexi-access drawdown is that your retirement savings stay invested even as you’re withdrawing cash from your pension pot. This leaves open the opportunity for investment growth, although it’s important to remember that your fund could go down as well as up in line with market performance.

Still, the alternative — buying an annuity — sees you hand your cash to an insurance company and forfeiting the right to any capital and investment growth from your fund.

Although you receive a guaranteed annuity income for the rest of your life in exchange for your hard-earned savings, annuity rates are currently very low. Plus, you’ll miss out on the potential for any post-retirement growth in your pension investments.

Added Flexibility With Pension Drawdown

Another benefit of pension drawdown is that it offers you huge flexibility in terms of how you withdraw cash from your pension. This works particularly well if you don’t need a regular income and can therefore just dip into your pension here and there as required.

While there is likely to be tax to pay on any income drawdown withdrawals, speaking to an adviser and planning for these can help minimise your tax liability.

Generally, income drawdown is better than an annuity when it comes to tax-efficiency. This might be valuable to you if your income is derived from multiple sources (e.g. other pensions, savings, non-pension investments or buy-to-let properties etc.).

While an annuity pays you a fixed amount, which is then added to your total earnings that tax year, pension income drawdown lets you increase and decrease your income in any given tax year as required.

In years where it appears your earnings may push you up a tax bracket, you can withdraw little or nothing from your flexi-access drawdown fund as a way of staying below the threshold.

Can I Buy an Annuity With My Drawdown Fund?

Absolutely. If you decide later in life that you’d rather opt for an annuity — perhaps because you’re older and your health has deteriorated, meaning you can get a better deal with an enhanced annuity and / or need a regular income to pay for care — then you can.

You could even buy an annuity with some of your pension savings early on and put the rest into pension drawdown. That way, you could benefit from having a stable income from the annuity but also the additional flexibility and investment growth provided by income drawdown.

Passing On Your Pension Tax Efficiently

Another benefit of income drawdown is that it offers far more freedom when it comes to your family inheriting your pension.

If you want to pass on your pension to your love ones, an annuity offers only limited options. Generally, beneficiaries of an annuity income can be your spouse — who’ll most likely get a reduced survivor’s pension — or dependent children, but only up until the age of around 23. There are few other options.

With income drawdown, providing the funds remain invested in your pension (i.e. not withdrawn and sitting in a bank account, for example), there’s no inheritance tax due on your pension savings.

Your beneficiaries also won’t have to pay income tax on the pension fund they receive if you die before you’re 75. If you die after this age they’ll have to pay income tax on the fund, however, at their highest marginal rate when they start to draw on it.

Pension 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.

  • £
  • £
Discuss your results with our experts
Receive Our Making Sense of Pension Income Drawdown guide

Disadvantages of Drawdown

Could it be wrong for you? While pension drawdown has its advantages, it won’t be right for everyone. Income drawdown might not be right for:

  • Those with smaller pension pots — these will likely be depleted too fast with income drawdown
  • Those worried their pension might run out — tools such as our Pension Drawdown Calculator can give you an idea of how long your pension will last, but if you take too much cash out or your investments don’t perform as you hoped then your pension fund could run dry
  • Those who don’t want to take investment risk — if you don’t feel comfortable managing your own investments or are concerned with the fact that your fund could fall as well as rise, income drawdown is unlikely to be for you
  • Those who need a regular, secure income
  • Those who don’t want to pay ongoing charges to access their pension — because pension drawdown keeps your pension pot invested, there are ongoing fees and management charges, including potentially fees on withdrawals, that aren’t present with an annuity.

Your Financial Plan – Build A Better Future

A good financial plan can help you make the right decisions when it comes to your finances. Make the right decisions today to build a more prosperous future.

Good financial planning with clear goals can increase your retirement income by as much as 53%. Old Mutual Redefining Retirement Survey

Why Speak to Us…

We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as planning our finances. Below are just a few reasons why it makes sense to let us help.

  • See your financial future
    We use sophisticated financial modelling technology to visually show you your financial future. A living financial plan where you can clearly see what you can achieve depending on the decisions you make – read more
  • Achieve the retirement you deserve
    Can afford that dream round-the-world trip? Can you help your children onto the property ladder? We’ll model your goals and build your financial plan to help you achieve them.
  • Our expertise saves you time and provides peace of mind
    Organising your pensions, investing your assets, managing risk and making the most of your tax allowances is all taken care of as part of your financial plan.
  • We’ve got bargaining power on our side
    This allows us to negotiate better rates for you than dealing with providers yourself.
  • You’ll speak to a dedicated expert from start to finish
    You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
  • Benefit from our 5-star service
    We pride ourselves on providing a 5-star service, as can be seen from our 2386 and growing independent client reviews rating us at 4.92 / 5.
  • Gain the protection of regulated advice
    You are protected. Where we provide a regulated advice service we are responsible for the decisions we help you make. Doing it yourself or going direct to a provider won’t provide this protection, so you won’t benefit from these securities.

Our Services & Tools

See Your Financial Future
Find > Organize > Simplify
We exist to improve your financial wellbeing

We use clever technology to bring your financial future to life

  • Find, organise and simplify your Pensions, ISAs and other investments.
  • Plan your financial future and put a strategy in place to achieve this.
  • Regularly review how you are doing to make sure you stay on track.

Contact Us

Head Office & Pensions and Investments
Senator House
85 Queen Victoria Street
London
EC4V 4AB
Personal Insurance & Accounts Payable
Telecom House
125-135 Preston Road
Brighton
BN1 6AF
Drewberry London Office MapDrewberry Brighton Office Map

If you are unhappy with our service, we have a complaints procedure, details of which are available upon request. If you are unhappy with how your complaint has been dealt with, you may be able to refer your complaint to the Financial Ombudsman Service (FOS). The FOS website is www.financial-ombudsman.org.uk.

Drewberry Ltd is registered in England and Wales. Companies House No. 06675912

Drewberry Ltd registered office: Telecom House, Preston Road, Brighton, England, BN1 6AF. Telephone 0208 432 7333

Drewberry Ltd (Financial Conduct Authority No. 505473) is an Appointed Representative of Quilter Wealth Limited and Quilter Mortgage Planning

Limited, which are authorised and regulated by the Financial Conduct Authority.