Since April 2015’s Pension Freedom reforms took hold, we have heard from many customers who are signed up to pensions that do not provide drawdown facilities, and many of them want to know whether there are alternative to taking out an annuity.
The good news is that we work with a group of top-notch pension experts who can work with you to find the best drawdown pension options for your unique needs and circumstances. This handy guide will lay them out for you, and you’ll find the following topics covered below…
It goes without saying that there is no one best drawdown pension account (i.e. a pension which is able to facilitate the changes made by Pension Freedoms), such as full drawdown access) for everyone. If there was, articles like this would be redundant.
Instead, it’s worth considering what you, specifically, need out of a pension drawdown product and, as such, what would make such a pension best for you and your circumstances.
One way to get clear on this is to speak an advisor, like one of the experts we work with.
In the meantime, here are a few things to bear in mind when weighing up the pros and cons of a product that facilitates income drawdown
What kind of pension you can transfer in from
There are three main types of pension that you could transfer in from - ‘defined contribution’, ‘capped drawdown’ (this mainly relates to Defined Contribution aka Money Purchase pensions) and ‘final salary’ (most pensions experts would only advise a transfer in a minority of cases). Not all providers will accept each kind.
Whether you need financial advice to draw down
Some companies will require new customers (or existing customers who don’t have a drawdown account) to take financial advice before opening an account, some don’t.
Minimum fund limits
Most providers don’t set an upper limit on the size of your pension pot, but many of them have a minimum that they’ll accept.
Fees and charges
This one’s paramount. Every fund and fund provider will charge differently - some will charge more than others. And of course, the less you pay in charges, the better your returns will be - everything else being equal.
As just a few examples, keep an eye out for:
New set-up fees
Annual administration charges
Commission due if you switch funds
It’s also worth remembering that some providers will become more economical if your pension pot is larger - as they decrease their fees for larger pots.
Your provider is legally obligated to let you know about every fee, but the way that they do this isn’t always clear. When in doubt, get advice from an independent advisor.
What the fund invests in will help to determine what kind of returns you get, and the kind of risks your funds are subjected to.
An advisor will conduct an Attitude to Risk analysis to determine what level of risk you should be exposed to. This will be redone at regular intervals and, as is often the case, reduced as people get closer to retirement and want to secure the capital they have accumulated.
Seeing as there is the possibility of loss, it’s important to pick a fund that matches your level of risk tolerance, and that invests in assets that you would be comfortable holding.
Everything else being equal, a provider with a larger selection of fund choices will be a better option for you, as it’s more likely that one of the funds will be suited to your specific needs.
What is the best pension drawdown rate for me?
In April 2018 The Institute and Faculty of Actuaries suggested that people draw down at a rate no higher than 3.5%. For years, much of the industry took 4% as the ‘going rate’ - despite many considering such drawdown pension withdrawals to be wildly optimistic.
But as a rule of thumb, don’t follow the rule of thumb here.
How much should I draw down per year?
How much to draw down in retirement is very much a 'case by case’ basis. It’s dictated by your current and desired lifestyle, the size of your pot, the performance of your investments, and a host of other individual lifestyle factors.
An advisor can help with this. They can take a holistic look at your needs and circumstances, and help you to draw up a budget and a plan that takes into account your needs, both now and in the future.
Is there a limit on UK drawdown income rates?
Only for those still on Capped Drawdown pension schemes, which were replaced by Flexi Access in 2015.
For people in this boat, pension drawdown rates for 2019 (and every year) are set by the GAD (Government Actuary's Department ) - who determine the maximum amount you can withdraw every year, based on your age (the rate is unisex).
As a rule of thumb - the older you are, the more you’re allowed to withdraw. You can find up to date tables on maximum income drawdown rates on the government’s website.
That said, the GAD hasn’t made the figures particularly easy to understand, so if it’s your first time, or you’d like a little help calculating them - speak to one of the expert advisors we work with for a better idea of what you might be entitled to.
Is there a ‘safe’ pension drawdown withdrawal rate?
Not really. In 2018, The Institute and Faculty of Actuaries recommended a drawdown rate of no more than 3.5% a year - but everyone’s circumstances are different. As such, how much an individual wants or needs to drawdown will be determined based on their needs and circumstances.
Your fixed expenses, pension pot and return rates all need to be factored in. As a rule of thumb, the lower your withdrawal rate, the ‘safer’.
Get in touch if you’d like one of the advisors we work with to provide you with a pension drawdown estimate.
What’s a typical drawdown pension’s growth rate?
Most providers advertise an average return on pensions that facilitate drawdown between 2-6% - depending on which specific product you choose.
But remember, these rates are predicted, not guaranteed.
How do I get the best drawdown pension returns?
This is a tricky one - income drawdown fund performance are typically linked to the performances of a particular market or fund manager.
As the old financial services saying goes - ‘past performance is no indication of future results’, and the rate you’ll get on your pension is not something that anyone can predict with any degree of accuracy.
That said, one way to get the best returns (seeing as you can’t directly control how well your funds perform) is to ensure that you pay as little as possible in fees and charges.
Talk to an expert for help with drawdown pensions
If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.
Then sit back and let us do all the hard work in finding the pensions expert with the right expertise for your circumstances. – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.
*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA.Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.
Tony has worked in a vastly diverse array of areas in the pensions industry for over 2 decades. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events. Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been "Hope for the best, but PLAN for the worst", and believes that the biggest impact that an adviser can have on a client's life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they WANT their retirement to be.