Pension drawdown is a way of flexibly accessing a defined contribution pension at retirement. You shift your pension pot to drawdown, where it’s reinvested in funds designed to provide you with an income stream to live off in your later years.There are several names for pension drawdown:
The earliest you can access your pension is 55 with most defined contribution schemes (unless you have an earlier protected retirement age or are seriously ill).
When you decide to retire, you move your pension to drawdown where it remains invested. You’re entitled to take up to 25% as a tax-free cash lump sum from your pension at this point. Thereafter, all income you draw from the fund will be taxed as income at your highest marginal rate.
Flexi-access drawdown is an inherently flexible way of accessing your retirement savings and has a number of benefits over other ways of accessing your pension pot.
However, despite these benefits, it’s not the best pension option for everyone. For those people who want a guaranteed, lifelong income there are still few alternatives to an annuity. There may be other reasons why drawdown isn’t right for you — to be sure, it’s worth speaking with a pensions adviser.
This should be your foremost consideration if you’re thinking about pension drawdown — unlike an annuity, flexi-access drawdown offers you no lifelong guarantee of an income.
Our Pension Drawdown Calculator can give you an idea of when your income drawdown pension will run out, but it’s no substitute for the expertise of a financial adviser.
A pensions adviser can help put together a tailored schedule of payments from your drawdown fund, finding the best way to balance your need for income with longevity risk.
This will be to try and ensure you can live comfortably in retirement but won’t run out of cash too early.
Before you even see a penny from flexi-access drawdown, you’ll have to choose a drawdown provider. Not every pension provider will allow you to use income drawdown (although most modern self-invested personal pensions or SIPPs will). However, if yours doesn’t, you may have to transfer your pension to a provider that does.
Even if your pension provider will allow you to opt for drawdown to provide your pension income, there’s no guarantee that they will offer you the best pension drawdown deal in the market. As with most financial products, it pays to shop around.
There are a number of factors to consider when you compare flexi-access drawdown providers. Although pension drawdown is a fairly homogeneous product in terms of what it offers — a flexible way of accessing your pension — there are a number of different providers all with different propositions and different fees and charges.
The end result may be similar, but the way you access your pension and pay for pension drawdown could vary drastically between providers. That means finding the best income drawdown provider for you isn’t a one size fits all process.
There can be a huge array of fees, charges and other costs when setting up an income drawdown pension and drawing benefits from it, so it’s definitely worth comparing the various providers’ propositions to see which one will work out better for you.
These pension drawdown fees might include platform fees and management charges, as well as charges each time you actually draw cash. There may also be a fee for transferring your pension to that provider, so you’ll have to take that into account as well.
So when your adviser searches for the best pension drawdown provider for you, part of their job will be balancing the benefits of each provider with the fees you’ll be charged.
It’s rarely the case of simply picking the cheapest pension drawdown provider. While there are many excellent low-cost flexi-access drawdown options available, if they don’t suit your needs in other ways then choosing them purely on the basis of cost could be a bad choice.
Head of Financial Planning at Drewberry
Based on our research, below is a selection of the best UK income drawdown providers. However, this list is not exhaustive and there are many more options out there available on the market.
Aegon’s UK operations are wholly owned and operated by Dutch life insurance, pension and asset management firm Aegon N.V. Aegon was formerly known as Scottish Equitable but, after Aegon N.V. increased its stakeholding to 100% of the company, Scottish Equitable eventually re-branded to Aegon in 2009.
Its fees and charges are as follows:
AJ Bell Youinvest
AJ Bell Youinvest is the low-cost brand of pensions and investments firm AJ Bell. It’s SIPP permits drawdown directly from your pension fund and is subject to the following charges:
Alliance Trust Savings
Alliance Trust was founded in 1890 and provides full SIPPs, as well as ISAs and investment dealing accounts.
Ascentric was formed in 2006. Royal London quickly acquired a majority shareholding in 2007, eventually going on to wholly own Ascentric by 2014.
Ascentric is committed to offering simple pricing, a clear and transparent structure, no additional fees and one annual platform charge of:
Bestinvest was founded in 1986. It provides execution-only investment services as part of the Tilney Group, including a low-cost SIPP.
Charles Stanley Direct
Charles Stanley is a UK investment management company established in 1792, making it one of the oldest firms on the London Stock Exchange. It’s Charles Stanley Direct brand is its direct-to-consumer operation.
Fidelity International was founded in 1969 as the international arm of Fidelity Investments, a financial services corporation based in Boston, Massachusetts. It became independent from Fidelity Investments in 1980.
Based in Bristol, Hargreaves Lansdown was founded in 1981. It offers ISAs, pensions, investments, financial advice and share dealing services.
Rowanmoor is the UK’s largest independent small self-administered scheme (SSAS) provider and a provider of bespoke self-invested personal pensions (SIPPs).
A big part of opting for pension drawdown is the fact that your pension remains invested in retirement. As such, you need to be sure you’re choosing the best investments for your circumstances.
An adviser will also be able to discuss with you your appetite for risk and, given that, steer you towards the better pension drawdown investment options for you.
At the most conservative end of the scale would be investments in cash and government gilts. These are among the safest investments around but the fact that there’s so little risk involved also means that, in today’s low-rate environment, there’s also very little reward. However, if you’re not comfortable with investment risk this may be the best option for you.
More adventurous investors would likely hold a larger proportion of their fund in dynamic assets such as equities, i.e. stocks and shares. However, there is more risk of volatility with equities that not everyone is happy to take on.
Other options include corporate bonds and commercial property, while you can also invest your assets in funds such as unit trusts or investment trusts.
The freedom and flexibility introduced by flexi-access drawdown has benefitted many people, but unfortunately pension fraudsters have taken advantage of growing consumer awareness of pension drawdown and put together scams to con you out of your retirement savings.
Pension fraud might include promises to unlock or release your pension, especially before the age of 55. While this might sound similar to legitimate pension drawdown, it’s actually very different.
This is particularly true if you look to access your pension before the age of 55, which is almost never possible unless you’re severely or terminally ill.
While a small minority of historic pension schemes allow you to start drawing your benefits before the age of 55, this doesn’t apply to most active schemes. If you’re wondering if this applies to you, it’s easy to find out with a simple phone call to your pension provider. It’s vital you get confirmation this is the case first before you act.
One basic question to ask yourself is this: Does it sound too good to be true? If so, as with most areas of life, it most likely is.
Accessing your pension early, before the age of 55, will almost always be classed as an ‘unauthorised withdrawal’ by HMRC unless you’ve been given special permission because your life expectancy is severely compromised.
As such, HMRC will most likely slap you with a 55% charge on your withdrawal. That’s before you’ve even paid the often steep fees pension scammers usually levy on the whole process.
Also, promises of ‘guaranteed returns’ should ring alarm bells. All investment carries risk and your fund could always go down as well as up. While there are cautious portfolios designed for those who dislike investment risk which aim to minimise the risk of loss as much as possible, there are no definitive guarantees.
If you’re promised guaranteed returns that seem extremely high — e.g. in double digits — be extra cautious.
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
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