A guide to pension drawdowns
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We receive a lot of enquiries from people who are approaching retirement or already into it, having saved into a pension plan throughout their working lives, and now want to know how to drawdown their pension income.
Whether you’re simply wanting to know the options available before taking your pension drawdown or if you’d like to have the whole concept of pension drawdowns explained in full, the information outlined below will, hopefully, provide the answers you need.
In this article we will cover:
- What is a drawdown pension and how do they work?
- What types of pension drawdown are there?
- How does flexi-access drawdown work?
- How does Uncrystallised funds pension lump sum (UFPLS) work?
- How did pension drawdown work before April 2015?
- How did capped drawdown work?
- How did flexible drawdown work?
- How much can I drawdown from my pension?
- Who is eligible for pension drawdown?
- How to get a drawdown pension
- What do I do if my pension plan provider does not offer flexi-access drawdown?
- Can I choose a pension drawdown arrangement if I’m in a Final Salary pension scheme?
- Pension drawdown pros and cons
- Advantages of income drawdown
- Disadvantages of income drawdown
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- Frequently asked questions
- How will my pension drawdown funds be treated for tax purposes?
- Can I still contribute to a personal pension, and get tax relief, whilst receiving my pension drawdown funds?
- What happens to my pension drawdown funds when I die?
- Is pension drawdown assessed against my pension lifetime allowance?
- What alternatives are available other than pension drawdown?
- How big a pension pot do I need for income drawdown?
- Can I drawdown savings from a stakeholder pension?
- Can you take pension drawdown and still work?
- After you have started receiving a pension can you drawdown a lump sum?
- Can I drawdown from my state pension?
- Can I use income drawdown for my private pension?
- How to set up a drawdown pension
Once you’ve read through these details, make an enquiry so we can arrange for an advisor we work with to contact you directly and discuss your own circumstances.
Pension drawdown definition: What is a drawdown pension?
A pension drawdown account (or income drawdown, as it is sometimes referred to) is the facility used to access savings accrued from your pension fund once you reach retirement.
Anyone over the age of 55 who has saved into a defined contribution pension scheme (sometimes referred to as money purchase) is allowed to access their pension pot using a drawdown account.
How does pension drawdown work?
Drawdown pension schemes provide a healthy alternative to the traditional method of purchasing an annuity, allowing for greater control and flexibility over how and when the income is received.
With income drawdown your pension funds remain invested in a range of underlying assets with the aim of providing further capital growth whilst you access money as and when you require the income. Due to the nature of these assets there is the possibility your fund may fall in value as well as increase.
What types of pension drawdown are there?
Now that we’ve covered the meaning of the term ‘pension drawdown’ and discussed how it works, it’s time to outline the different types of income drawdown products currently available in 2019.
In April 2015 the UK Government introduced a number of changes to how pension drawdowns could be administered. Since these changes there are two main types of drawdown pension facilities available:
- Flexi-access drawdown
- Uncrystallised Fund Pension Lump Sum (UFPLS)
How does flexi-access drawdown work?
This is the most common option.
With a flexi-access drawdown you are allowed to take up to 25% of your pension drawdown fund as an upfront tax-free cash sum. You don’t have to take this money at outset, however, you cannot defer this opportunity to a later date.
The remaining fund can be withdrawn at any time and without any limits. You could withdraw all of it in one go, take regular payments – monthly/quarterly etc or as ad hoc lump-sum payments as and when required.
How does UFPLS work?
With the UFPLS option the 25% tax-free cash lump sum payment is not taken up front. However, with each drawdown payment you make, 25% of it will be tax free and the remaining 75% liable for income tax at your marginal rate.
So, if you take an annual income drawdown payment using a UFPLS of £20,000 from your pension fund, the first £5,000 is tax-free and only the remaining £15,000 would be taxable income.
How much can I drawdown from my pension?
With the new rules introduced in the UK since April 2015, there really is no limits to how much (and when) you can drawdown from your pension. The sensible approach is to withdraw the money as and when required using a frequency that suits your own personal circumstances.
If you have other retirement income that covers your requirements it may prove more beneficial to leave your pension fund invested and given the opportunity to grow. Either way, you have the flexibility to access your pension savings as and when required.
If you’re still unsure as to how you should drawdown on your pension savings, get in touch and we can arrange for an expert to contact you and discuss further.
Who is eligible for pension drawdown?
The main criteria for pension drawdown starts with your age; you must be at least 55 years old before you can consider an income drawdown plan. After that it really depends on the type of pension plan you are saving into.
Pension drawdown schemes are typically associated with money purchase or defined contribution plans. However, your pension plan provider is not obliged to offer a flexi-access drawdown facility and in such cases you would need to consider your options. It is also possible that your pension plan predates the government’s Pension Freedom legislation and therefore does not have income drawdown written into it.
Make an enquiry to speak with an advisor for more information.
How to set up a drawdown pension
Drawdown pensions can be quite a complex area of financial planning and, naturally, it’s very important your retirement savings produce a satisfactory level of income that suits your requirements.
If you’re unsure how to access the best drawdown pension for your own needs, make an enquiry with us and we can arrange for an experienced pensions advisor to offer assistance and work on your behalf to identify the best pension products from across the market.
What do I do if my pension plan provider does not offer flexi-access drawdown?
If your pension provider does not offer this facility you will need to ascertain whether you can transfer your pension fund to a provider who does. Before agreeing to any switch you need to check how much will be charged both for the transfer and for receiving the pension fund for your income drawdown.
You should also check that you don’t miss out on any bespoke guarantees or benefits available with your current provider that may not be available with your new one. It is strongly recommended to seek professional advice in this area before proceeding.
The advisors we work with will be able to help you identify personal pension providers who will offer income drawdown. They can also review your existing arrangements and compare what benefits you may/may not miss out on, along with outlining what charges may be incurred.
If you make an enquiry we can arrange for a pensions specialist we work with to get in touch and discuss further with you.
Can I choose a pension drawdown arrangement if I’m in a Final Salary pension scheme?
A drawdown pension would not be an option available to anyone in a final salary pension scheme (also known as a defined benefits scheme). The only way this is possible is by transferring from a defined benefits scheme to a defined contributions scheme that offers a drawdown facility.
Most pension advisors would recommend sticking with a final salary pension as the benefits they offer usually outweigh those on offer through money purchase schemes. However, some people choose to switch in extreme circumstances, such as contracting a life-limiting illness, divorce or financial difficulty.
If you’d like to speak with an expert on this area, make an enquiry and we can arrange for someone to contact you and discuss further.
Pension drawdown pros and cons
There’s no doubt that pension drawdown offers a great deal of flexibility with your pension fund than was previously the case.
There are a number of advantages for using this facility with your retirement fund, however, there can also be some disadvantages, as outlined below:
Advantages of income drawdown
- Greater flexibility and control to access some or all of your pension fund as and when required
- Opportunity for your pension savings to continue accruing capital growth whilst you take income from the fund
- Access to 25% of the fund as a tax-free lump sum either at outset (flexi-access) or with each regular payments (UFPLS)
- Managing your income tax liability
- Ability to pass on any unused funds to beneficiaries in the event of your death
- The pension holder may not have to purchase an annuity
Disadvantages of income drawdown
- Payments not guaranteed for life
- Risk of running out of money sooner than expected
- Value of the pension fund can fall as well as rise depending on performance of underlying assets
- Complexity and lack of understanding of when may or may not be best to withdraw funds
- High charges may apply for switching providers
If any of the pension drawdown pitfalls we’ve flagged up here concern you, first of all, don’t panic. There’s a chance some of them won’t apply to you, and even if they do, the advisors we work with can suggest ways that you can safeguard yourself.
Make an enquiry to speak with one of the over the phone today.
Frequently asked questions
How will my pension drawdown funds be treated for tax purposes?
Pension income is treated as earned income for tax purposes and could, therefore, be liable for income tax in the tax year that it is received. Other than the 25% tax-free lump sum or, in the case of UFPLS arrangements 25% of any regular payment, any money received from your pension drawdown could be liable.
If you are still earning money from a range of different sources your pension drawdown income could push you into a higher-rate tax bracket, therefore, it is recommended to speak with a tax specialist or financial advisor if you have any concerns.
Get in touch and we can arrange for an expert to contact you to discuss this area in more detail.
Can I still contribute to a UK pension, and get tax relief, whilst receiving my income drawdown funds?
Yes, this is allowed. However, the money purchase annual allowance, since April 2017, has reduced from £10,000 to £4,000. This is the maximum amount you can pay into a personal pension plan each year, and still receive tax relief, whilst in receipt of pension income from a previous defined contribution scheme.
What happens to my pension drawdown funds when I die?
If funds remain in your pension drawdown account when you die they can be paid to a beneficiary tax-free if you die before you reach 75 years of age providing the proceeds are paid to them within two years. If the proceeds are paid after two years they are treated as income for tax purposes after personal tax allowance.
If you die after reaching 75 years of age any money from the pension drawdown fund is added to the beneficiaries income and will be taxed at their marginal rate.
All proceeds, regardless of your age when you die will be free from any inheritance tax liabilities.
Is pension drawdown assessed against my pension lifetime allowance?
Yes they will. If you are below the age of 75 they will be tested first when you place funds into a designated drawdown account. If you have not placed any funds into a drawdown account by the time you reach 75 they will be assessed at this point against the lifetime allowance. Any increase in value of your drawdown pension fund will also be assessed on your 75th birthday.
Beyond 75 no further assessments are taken (because they’ve already been tested by this point either way). The lifetime allowance currently stands at £1,030,000 for the current tax year and will rise to £1,055,000 for the 2019-20 tax year.
Any amounts which exceed this allowance attracts a tax charge of 25% for income drawdown or 55% if withdrawn as a lump sum.
If you have any concerns about your own pension fund exceeding the lifetime allowance, make an enquiry and we can arrange for an advisor we work with to get in touch.
What alternatives are available other than pension drawdown?
The main alternative to pension drawdown would be to purchase an annuity. The benefit of an annuity is the certainty of knowing that you have a guaranteed amount of income either for life (Lifetime Annuity) or for a fixed period of time (Fixed Term Annuity).
The amount you receive from an annuity is based on a number of factors, namely your health, the size of your pension fund, current annuity rates, your age and the type of features you want from your annuity policy.
If you’d rather not consider an annuity you could consider other options either by taking the whole fund as cash and investing in something else completely (for example – property or a business) or just delay taking anything out of your fund until you have a clearer idea what you’d like to do with it.
How big a pension pot do I need for income drawdown?
The size of your pension fund really depends on what income you need when you retire. It’s important you regularly review your pension plans to ensure they are on track to deliver the amount you need to achieve this aim.
If you make an enquiry with us we can arrange for a pensions expert to contact you to review your current arrangements.
Can I drawdown savings from a stakeholder pension?
Stakeholder pensions are money purchase schemes, therefore, as with all other pensions that fall into this category, income drawdown would be available for these plans.
If you are currently contributing to a stakeholder scheme and would like to know more about pension drawdown, make an enquiry and we can arrange for an expert to contact you.
Can you take pension drawdown and still work?
Yes, it’s possible. Some people may opt for a phased retirement, continuing to work but reducing their hours. In these circumstances it is possible to opt for a phased income drawdown to top up your income during this period.
After you have started receiving a pension can you drawdown a lump sum?
If you opt for a flexi-access drawdown you have the flexibility to take ad hoc lump sum payments if you wish. However, the 25% tax-free lump sum is only available at the outset.
Can I drawdown from my state pension?
Once you reach state pension retirement age (66 for both men and women from October 2020) you receive a fixed amount each month until you die. Drawdown is not available.
Can I use income drawdown for my private pension?
A private pension is another name for a personal pension and, therefore, drawdown would be available as, regardless of the terminology, both fall into the category of a defined contribution pension scheme.
Speak to a pensions expert
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