Using drawdown for retirement income
A drawdown pension is a way of generating an income whilst your pension fund remains invested. You decide when and how much income you want to drawdown from your investments.
It is also known as flexi-access drawdown, income drawdown or flexible income.
You may prefer the flexibility of a drawdown pension but you will need to make sure that you understand the pros and cons of choosing this route as it is not without risk.
Care must be taken in deciding whether this product is suitable for you and your personal circumstances as there are elements of risk that could affect the income available to you.
|Drawdown advantages||Drawdown disadvantages|
|Flexibility about when and how much income can be taken.||There is an element of risk - investments may fall and your pension fund could decrease, which could mean a significant decrease in future income.|
|Flexibility in deciding how much of your fund to invest for different growth outcomes.||Generally, smaller fund sizes are unlikely to survive a prolonged fall in investment performance.|
|On your death before age 75, the remaining drawdown fund can be returned to your beneficiaries as a tax free lump sum, or they can continue to receive the income tax-free through drawdown. After 75 it is taxed at your beneficiary’s marginal tax rate.||Fees will usually be charged for administration and investment management. The costs associated with these arrangements can be high.|
|You can still buy an annuity later on in your retirement provided you still have the funds to do so.|
If you are considering this type of product it is important to get some guidance or advice about its suitability for your personal circumstances.
Alternatively every retiree is entitled to some free guidance from the UK Government’s ‘Pension Wise’ service.
Find out more...
How does income drawdown work? +
To start you transfer your pension savings to an income drawdown scheme. This could be with your pension savings provider or another company.
When you transfer your savings you can take your 25% tax-free cash as well as a further cash lump sum should you wish although this will be taxable. Please bear in mind, if these pension savings are your only source of retirement income, then the more you withdraw at the beginning the less you’ll have left later on.
The remaining pension pot is then invested in one or more funds to provide growth and income. You drawdown taxable income directly from these investments.
You can usually take your income as often or as infrequently as you wish. You can change how often you take our income after your drawdown scheme has been set up.
Is drawdown right for me? +
If you want to keep your options open and avoid being locked into an annuity then drawdown could be for you.
Income drawdown will also appeal to you if you’d like to have flexibility over the frequency and amount of income you take or actively manage your invested pension savings.
As your invested money can go up or down you need to have a healthy attitude to risk. If you want a risk free, guaranteed income for life that’s low maintenance then drawdown is not for you.
You will need a large fund if this is your only means of generating an income in retirement.
If you are interested in drawdown we recommend you seek financial advice.
How much income will income drawdown give me? +
Unlike a pension annuity, drawdown does not provide a guaranteed income for the rest of your life. How much you can take will depend upon:
- How much money you have saved in your pension pot
- How often you take some income and of course how much – the more you take, the less there is for the future
- How long you live
How much can I invest? +
Whilst there’s usually no upper limit to the amount you can invest providers will set minimum limits, which can be around £20-30,000.
Tax relief on future pension savings +
Once you start drawing an income the amount of defined contribution pension savings on which you can get tax relief each year is reduced. If you want to carry on building up your pension pot this may influence when you start taking income. If you take the tax-free lump sum and no income, your allowance for tax relief on pension savings is not affected.
To find out more, see Money Purchase Annual Allowance and Annual Allowance in our Jargon buster.
Can I switch from drawdown to an annuity? +
Provided you have sufficient funds left in your drawdown account you can purchase an annuity at any time. Remember that annuity rates can go down as well as up, so delaying could cost you more.
Will my dependants receive anything when I die? +
Providing you have sufficient funds your dependants can continue to receive payments. These will be re-calculated using their age and the fund’s value at the time of your death.
Alternatively they can buy an annuity and/or choose to receive a taxable lump sum.
If you don’t have any dependants you can choose to leave a lump sum to a named beneficiary.
Can I run out of money? +
If you take too much income or live longer than you anticipated then you could run out of money.
Whilst no one can be sure how long they will live, statisticians use information about you and statistical analysis to identify the probability of living longer. Why not use our longevity calculator to see the probability of how long you might live?
What tax will I pay? +
As you received tax relief on your pension saving contributions as you made them, any funds you move into drawdown from other pension plans will not be eligible for further tax relief.
As with annuity income, the money you withdraw from a drawdown scheme is taxed as income.
If you have other income, you’ll need to plan carefully how much drawdown income to take, to avoid pushing yourself into a higher tax bracket. We recommend that any tax planning should be discussed with a financial adviser or tax expert beforehand.
If the value of all of your pension savings is above £1 million when you access your pot (2017-18 tax year), further tax charges may apply.
What happens when I die? +
If you die before age 75
You can pass on anything remaining in your drawdown fund as a tax-free lump sum to a nominated beneficiary, or they can continue to receive the income tax-free through drawdown. These payments must begin to be made within two years, or they become taxable at the beneficiary's highest rate.
If you die age 75 or above
For lump sum payments, your beneficiary will pay income tax at their marginal rate.