What exactly is a drawdown pension?

Getting the best income from your pension pot is essential. With annuity rates low the alternative of pension drawdown may have more factors to recommend it.

It seems to offer the potential for better returns over the course of retirement than the traditional approach of buying an annuity. 

At Continuum we are looking at what pension drawdown is, how it works and whether it can help you to look forward to the kind of retirement income you want.

What is pension drawdown?

Pension drawdown takes advantage of the relaxation in pension rules that were part of the pension freedoms act of 2015. It provides a new way to use the pension pot you have built up over the years. Rather than use it to buy an annuity โ€“ and income for the rest of your life โ€“ it allows you to withdraw some of the money from your pension pot while keeping the rest invested. This will provide you with an income that can be paid regularly or as an annual lump sum. 

How does pension drawdown work?

With an annuity, you use your entire pension pot to buy a set income.  It is guaranteed, for as long as you live.

But it might not be as generous as you would like, and most annuities are fixed, and unable to compensate for the effects of inflation.

With a drawdown pension, your savings stay invested to provide an income with the flexibility of allowing you to dip into them as you need the income.

If the underlying investments do well, both your pension fund and your retirement income can increase. 

A well-managed pension pot could provide you with capital growth that keeps pace with inflation or even beats it, while providing you with the income you want.

But a flexible drawdown pension is not risk free. If your investments perform badly, your income and the amount in your pension fund could both go down. Skilled ongoing management of your pension is important to make sure it matches your attitude to risk and your personal circumstances.

Is pension drawdown right for you?

Annuity rates are disappointingly low at present. The substantial pension pot that you have spent your entire working life building up may only be able to provide an income which means a real step down in your living standards.

A combination of low interest rates and the fact that we are all living longer will probably mean that this position will not be changing in the foreseeable future.  Drawdown might provide a very real alternative. Many providers will help you arrange it, but you will need to check whether your pension provider offers the flexible access required. If they donโ€™t, you may be able to transfer your pot to a scheme which does - but there may be costs involved and you should get independent pension advice first.

Drawdown or annuity?

There are some ongoing costs with income drawdown but it could be more suitable for you, especially if you are planning to carry on working part-time or if you have income from other savings or investments.

An annuity, on the other hand is simple and relatively risk free. You know exactly what your retirement income will be, and your capital is not at risk. 

There could be a middle road. You could use part of your pension fund to purchase an annuity, either at the outset or a later stage, while leaving some of your pot invested, to dip into as you need it with a drawdown arrangement.

Getting some help

Your pension is too important to leave to chance and there are many factors to consider โ€“ not least the tax implications of any decision you make.

At Continuum we can help answer your questions and help you find the pension arrangements that are right for you โ€“ maximising your income and your security and helping you look forward to the kind of retirement you want.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable retirement strategy, you should seek independent financial advice before embarking on any course of action.

The value of investments can fall as well as rise and you may get back less than you invested.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.

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