This FREE personalised retirement pension drawdown report will:
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"Money Minder has certainly improved our financial position and, by their appropriate advice, boosted our income."
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"Money Minder came highly recommended by a friend. They sorted everything out, leaving us stress-free to carry on with our life."
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"I can honestly say the report made me fully understand the ways I can use my pension fund, making it so much easier to decide how to proceed with full confidence."
Pension drawdown is a way of taking money out of your pension pot to live on during your retirement, whilst also allowing your pension fund to grow. Instead of using all of your pension money to buy an annuity, you keep your money invested and take a regular income directly from the fund. In essence, it allows you to 'draw-down' on your pension fund.
In theory, you can use the fund like a bank account, as you take as much or as little from your plan as you wish. In reality, it's a lot more complex than a bank account, and it is important to ensure you invest the money in your pension appropriately if you are planning to utilise flexi-access drawdown. You can opt for a regular income, or take frequent or infrequent lump sums.
Read our FAQs below to learn more.
First of all, you should consider whether or not a drawdown is the right decision for you. There are other options that might be more suitable to you, depending on your own personal circumstances. Our pension drawdown calculator considers all of the relevant factors, such as the amount of money available in your pension fund, to determine how much income you can expect.
Since 2015, all former capped and flexible drawdown pensions have fallen within the definition of the Flexi-access drawdown (FAD).
Under the terms of a FAD, a person may choose to withdraw as much money from their pension pot as they like.
The first 25% of any income withdrawn is tax-free, with the remaining 75% of the amount taken out being taxed as income.
Drawdowns are subject to HMRC regulations, and ongoing charges from providers managing your investments.
For more information on pension drawdown and how it works, check out our recent pension drawdown article here.
There are multiple possible income options based on the choices you make. Our report from our Pension Drawdown Calculator will guide you through the options and clearly state how much income you can get from your Pension. It's important because the choices you make at this stage may not be able to be changed easily, or at all, at a later date.
Flexi-access drawdown is a type of pension drawdown that allows you to withdraw an uncapped amount of income from your pension pot every year.
You can take as much or as little as you want, but any money is taxable at your highest marginal tax rate.
We discuss flexi-access drawdown rules in greater detail in our flexi-access drawdown article here
Some of the pros of drawdown are:
Some of the cons of drawdown are:
An annuity is a guaranteed income, whereas drawdown is like taking money out of a bank account - it may not last as long as you do.
For some people, an annuity is likely to be the most appropriate option. Similarly for other people, flexi-access drawdown is most likely to be the most appropriate choice. Our Pension Drawdown Calculator strives to provide the information you require in a balanced way, to help you decide what will be most appropriate for you.
Are you struggling to decide between pension annuity and drawdown? Check out our latest article discussing the key differences between the two here
The income you receive from your pension fund, whether it is from an annuity or flexi-access drawdown, may have to last for 20 years or more. Over time, the cost of living (the price of everyday goods) naturally goes up, which is inflation. One consideration when selecting the level of income you take in retirement is whether to include any sort of provision for the increase in cost of living.
With an annuity, you have to choose an income option at the outset. Once you have selected your option, it cannot be changed. This means that if you do not include any sort of inflation protection, you won't be able to add this at a later stage. This also means that if you chose a 'level' rather than an 'escalating' income, your income will remain at the same level for as long as it is paid (potentially 20 or more years). This in turn means that as prices rise, the amount you receive from your pension will stay the same, and you consequently won't have as much to spend each year.
There is no automatic inflation proofing option with flexi-access drawdown. However, you do have the ability to increase or decrease the level of income you take as your circumstances change. Of course, the higher the level of income you take from the remaining fund, the less time it will last.
If you have an annuity, your income cannot be inherited by your dependents when you die, unless you have included a spouses/dependents pension at the point of purchase. Or, you have put in place a specific guaranteed payment period. For example, to ensure payments continue for 10 years or more from outset regardless of when you die.
If you are using drawdown on your pension and you die before the age of 75, your whole pension pot can be paid out tax-free. If you die after the age of 75, your beneficiaries may need to pay tax on the death benefits they receive, depending on the date they receive the money and their own individual circumstances.
An appropriate investment strategy only applies to flexi access drawdown. An annuity works by using your remaining pension fund to purchase an income for life. Your entire fund is given to the annuity provider and you have no responsibility for any investment decisions. The performance of the stock market will make no difference to the level of income you receive.
With flexi-access drawdown, your remaining pension fund needs to be invested somewhere and the investment decisions you make are likely to affect the level of income you are able to take later in your retirement. For this reason, it is important that you consider what investment strategy you should adopt and the potential effects this strategy could have on the level of income you could receive both now and in the future.
You can choose to take out as much or as little of your pension fund as you wish, from a very small amount to the whole pot. Whatever amount you choose, 25% of the amount you take will be free of tax and the remaining 75% will be added to your annual income and taxed as income accordingly.
For example, if you earned £20,000 per annum, your retirement fund is £50,000 and you decided to withdraw £30,000. £7,500 would be paid to you tax free (this is 25% of the amount you have taken (crystallised) and the remaining £22,500 would be added to your existing £20,000 income. You would pay income tax on the total amount of taxable income you have received, i.e. £42,500.
For more information on how much you can expect to pay on pension drawdown, read our latest article here
With an annuity, long life is not a problem. There is no risk of your retirement income running out. Additionally, if you have a medical condition, you might be able to secure a higher level of income. If you have a serious illness that is reducing your life expectancy, buying an annuity might not be the right thing to do.
With flexible access drawdown, living a long and fulfilling retirement could become a problem in the future if you don't get the investment strategy for your pension right. If your retirement ends up being longer than you had expected, you could run out of money. You need to think carefully about how long you need your pension fund to provide you with an income. If you get the investment strategy right, your income could be higher in later years or you might still have some money left in your pension pot to pass on to your loved ones.
Are you currently planning for your retirement, and you're unsure of how much pension you will need to retire? Check out our recent article discussing pension savings and how much you should ideally save at the different stages in your life here.
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In the conduct of business with you we will need to collect information about you which we will hold as data controllers under the General Data Protection Regulation (GDPR). We will use this information to ensure that our advice is suitable for your circumstances. Unless otherwise agreed, we will usually only collect basic personal data about you. If health, life insurance or enhanced annuity contracts are being applied for, we may request medical information including family medical history. This is known as "sensitive personal data".
If you wish to see a list of data which we may hold about you, please contact our Data Protection Officer, Ray Black.
We will use this information to ensure that our advice is suitable for your circumstances. All the personal data we hold about you will be processed by our staff and selected third parties in the United Kingdom. It may also be disclosed to the Financial Conduct Authority (FCA), who regulate us and Financial Ombudsman Service (FOS) which is an independent arbitrator and wherever there is a legal obligation that we do so. Additionally, it may also be disclosed to our Compliance Consultants and / or External Paraplanners and Consultants who help to ensure that, in your interests, we abide by the rules of the Financial Services and Markets Act, (FSMA) 2000 and any other regulations.
Please be aware that your information may be stored on a cloud-based system.
The FCA requires us to keep records of our business transactions for specified periods and as long as it is in your interests that we do so. We will generally keep your personal data for no less than for the duration of our business relationship.
Your data will be updated and amended if necessary at the regular review meetings that you have with your financial adviser and/or if you specifically notify us of any changes to your personal details.
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Under the General Data Protection Regulation, you have various rights regarding the use of your personal data which are as follows:
If you wish to raise a complaint about how we have handled your personal data, including in relation to any of the rights mentioned above, you can contact our Data Protection Officer Ray Black at ray@money-minder.com and he will investigate your concerns.
If you are not satisfied with our response, or believe we are processing your data unfairly or unlawfully, you can complain to the Information Commissioner's Office (ICO). You can find further information about the ICO and their complaints procedure at the following link https://ico.org.uk/concerns.
When using flexi-access drawdown to provide you with a retirement income, you can decide how much you take out of the plan each year. However, it is important to remember that you more you withdraw, the higher your income tax liability is likely to be and if you withdraw a significant amount of money out of your pension each year, the more likely you are to spend down your entire pension fund.
The amount you enter in this box should be the total value of all of your defined contribution pension funds.
It's possible that one or more of your pension plans may have a higher entitlement to tax free cash than 25%. This should be investigated prior to you drawing benefits. You don't have to take out all of your tax free cash in one go. Instead, you could choose to take release parts of your tax free cash only as you actually need it. The ability to 'phase' your tax free cash entitlement over a number of years is really helpful to individuals wishing to reduce their annual income tax liability in retirement.
