Cookie Use

Drewberry™ uses cookies to offer you the best experience online. By continuing to use our website you agree to the use of cookies. If you would like to know more about cookies and how to manage them please view our privacycookie policy.

Do I Have to Move My Whole Pension to Drawdown?

I like the idea of using flexi-access drawdown to access my pension savings in retirement, but I was wondering if I had to move all of my pension pot at once? I’m worried that I’ll pay a lot of tax on my pension if I allocate my entire fund to drawdown.

Question asked by Ms A Banks

Should You Move Your Entire Pension to Drawdown?

You don’t have to move your entire pension pot to drawdown all at once. In fact, in many cases, it might be better to allocate your pension to drawdown gradually over time. This is particularly true if you have a large pension pot.

With flexi-access drawdown, you’re entitled to take up to 25% of your pension as as a tax-free cash lump sum.

However, the rules of pension drawdown mean that when you withdraw tax-free cash, a sum equivalent to three times the amount of tax-free cash must be allocated to drawdown, which will be taxable as income when you need to take it.

Be warned — if you want to withdraw 100% of your pension in one go, 75% of it will be taxable as income at your highest marginal rate. This could result in a hefty tax bill.

Income Tax and Pension Drawdown

If you allocate your entire pension fund to flexi-access drawdown in one go, 25% is tax-free and 75% is moved to a drawdown fund. Lump sums and income derived from your new drawdown fund will all be potentially taxable as income in the year you take them.

If you move your pension pot gradually, not only will 25% of the sum you move to drawdown be tax-free, but 25% of the money you leave behind in your pension pot will also be tax-free later when you allocate the next tranche of cash to drawdown.

Flexi-Access Drawdown and the Pension Lifetime Allowance

Another issue when moving a large pension to income drawdown could be the lifetime allowance. This is a ceiling on the amount you can receive (or ‘crystallise’) from a pension in your lifetime.

The lifetime allowance is currently set at £1,055,000; if you breach it you’ll have to pay the lifetime allowance charge. This could be up to 55% of the excess funds you crystallise above your lifetime allowance.

When you move your pension to drawdown, you’re crystallising the funds you move. Shifting your entire pot to income drawdown at once therefore crystallises the whole pot — if you’ve got a large pension then you could easily exceed the lifetime allowance and lead to you paying the charge immediately.

If you move your pension gradually and don’t crystallise more than your lifetime allowance, you may be able to defer paying the lifetime allowance charge until you’re 75, where there could potentially be an opportunity to pay a reduced sum. However, this is a complicated area and it’s best to get professional pensions advice.

Inheritance Tax and Pension Drawdown

For those with large pension pots, taking 100% of your pension could cause an inheritance tax issue.

Funds invested in a pension or in drawdown are free from inheritance tax — they don’t form part of your estate. However, once you remove funds from your pension (e.g. as your 25% tax-free cash) and hold them elsewhere, such as your bank account, these become part of your estate.

So a person with a £1 million pension pot who takes their 25% tax-free cash entitlement immediately adds £250,000 to their estate. Given that the inheritance tax nil-rate band for a single person is only £325,000 and includes assets such as your home, £250,000 brings you very close to that limit immediately.

If you’re considering pension drawdown, we’d always recommend you receive regulated pensions advice from an expert such as those on the team at Drewberry before going ahead.

This is particularly true when considering the tax implications of flexi-access drawdown, as it’s a complicated area and getting it wrong could hit you hard in your wallet. We’re here to help – just pop us a call any time on 02084327334.

Our Services & Tools

Your Financial Plan

Who Are Drewberry?

Our purpose is simple: Improve your financial wellbeing. We use technology to bring your financial future to life and provide a visual plan of where you are today, where you want to go and what's necessary to achieve this.

📥 Financial Plan Brochure

Pension Pot Calculator

Pension Pot Calculator

How much will your pension be worth when you retire? Use our Pension Calculator to work it out and get a free copy of our Guide to a Richer Retirement.

  • £
  • £
Discuss your results with our experts
Receive our Guide to a Richer Retirement

Pension Drawdown Calculator

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

Final Salary Calculator

Final Salary Pensions Transfer Calculator

Find out how much your final salary pension might be worth in today's money if you considered accepting a cash equivalent transfer value from your scheme.

  • £
Discuss your results with our Pension Experts
Receive Our 2019 Guide to Final Salary Transfers

Book a Demo

Book Your Financial Planning Demo

Book a demonstration to see how our experts use advanced financial modelling software to maximise our clients financial wellbeing and keep them on track for the future they deserve 🤓

Calendar
Contact Us
Head Office & Pensions and Investments
Millennium Bridge House
2 Lambeth Hill
London
EC4V 4GG
Personal Insurance & Accounts Payable
Telecom House
125-135 Preston Road
Brighton
BN1 6AF
Drewberry London Office MapDrewberry Brighton Office Map
Our Core Principles
  • 1You Come FirstWe are a client focused business who always aim to put you first.
  • 2We are ExpertsTo provide you with the best advice, we need to know our stuff!
  • 3We are HumanWe are real people with feelings who are here to help you.
  • 4We are ProfessionalProviding a 5-star service requires a professional approach to everything we do.
  • 5We are here to EducateWe don't believe in sales, we are here to educate so you can make informed decisions.