Since pension freedoms were introduced in April 2015, people now have a number of options available to them, including to use their pension pots to provide a retirement income with drawdown.
One of those options could be to consider taking up to 25% of your pension pot as a tax-free lump sum and re-invest the rest into funds designed to provide you with a regular income. You can choose where you invest and how much income to take, living on the interest if you can or a combination of interest and your investment capital if you need to.
Drawdown is popular, because it means your pension pot could keep on growing if your investments perform well. On the downside, it’s not risk-free, and unlike an annuity which provides a guaranteed income for life your income isn’t secure.
On the plus side, it may offer the prospect of better returns than you are likely to be offered with an annuity.
You can choose where you invest, which should be in line with your attitude for investment risk. You can choose how much income to take, living on any potential growth of the investment or a combination of any growth or your investment capital if you need to.
So, what do you need to do to make the most of your drawdown?
Choose your investments carefully
If your investments perform well there’s every possibility that your fund value, and income, will increase over time. This could help you keep up with inflation and even help you improve your standard of living. But if your investments fall in value so will your income.
You might draw down only the income that your investments produce, which is known as the natural yield. This can avoid eating into your capital, which would eventually drain the fund and reduce the income available for the future.
Being in drawdown means you’re in control. You need to constantly review your investments and the yield they offer. It pays to get some expert help with your plans. At Continuum we will be happy to provide the investment expertise you need.
Have another source of income
Having other income gives you a safety net if your drawdown falls below the level you need. Secure income could come from many sources. You could use part of your pension pot to provide an annuity to run alongside your drawdown, you might have investment income from an ISA, and you may be able to call on the State Pension.
You may wish to consider holding an amount of money which would be accessible to meet your day to day requirements, if the market falls to potentially avoid having sell investments at a bad time.
Planning your alternative income and investments is something you need to think about before setting up a drawdown. At Continuum we can help with the planning and the figures.
Understand the tax position
After your tax-free entitlement, all withdrawals are treated as taxable income, and will be added to any other income you received that tax year. So large withdrawals could push you into a higher tax bracket. To overcome this, you need careful tax planning at all stages, and regular reviews.
Many plans will have substantial charges, so it’s important to shop around to make sure you aren’t paying too much.
But you need to make sure that you have the most suitable plan, and charges are not the only consideration. Some types of investment are much more complex than others so seeking expert advise is essential.
At Continuum we can help you shop around to find the drawdown plan that is most suitbale for you – and answer all your questions to help you make the most of it.
Simply call us.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
Accessing pension benefits early may impact on levels of retirement income and your
entitlement to certain means tested benefits.
Accessing pension benefits is not suitable for everyone. You should seek advice to understand your options at retirement.
The Financial Conduct Authority does not regulate taxation advice
moneyadviceservice.org.uk – Flexi-access drawdown