Pension drawdown schemes are intended to give clients more control over their pension funds and how and when to extract money from their pension pots. When you set up a pension drawdown scheme, you have the option to take out 25 per cent as a tax-free lump sum. Funds then need to be selected for the remainder of your pension pot.
You will be able to draw an income from this remaining pot on a flexible basis, but there are many factors to consider. As with all complex financial choices, it can be beneficial to talk to an independent financial advisor about your options.
Risk
Pension drawdown schemes, which are also known as ‘income drawdown’ schemes or ‘flexi-access drawdown’ schemes carry more risk than annuity schemes. This is because the income isn’t guaranteed for life so, to decide whether this type of scheme is right for you, it’s advisable to consider whether your pension pot will last you throughout your remaining life and if you need a flexible income.
Some of your income may be secure, such as a state pension or defined benefit/final salary pension scheme. Other income is flexible, such as savings and investments, salaried income and rental income, for example. Your Windsor IFA, Giles Warren, will help you to examine your income and work out whether a pension drawdown scheme is right for you.
If you do decide to go for a drawdown scheme, you will need to consider:
- How much you are likely to need to live on – taking into account your life expectancy isn’t always easy, but we can help you do this objectively.
- How much you can safely draw down each year. A tried and tested approach can be to withdraw just 4 per cent of your entire pension pot in the first year after retirement, increasing the amount by inflation each year after that.
- The fact that you can opt out of income drawdown schemes and use some or all of the pension pot to buy into an annuity later on if you prefer.
- How much you will be expected to pay in income tax on the income you draw down each year. Your IFA can help you plan the amount you drawdown carefully to limit your tax liabilities. You’ll want to avoid going into the higher tax bracket if at all possible.
- Your lifetime allowance. If your pension pot is worth more than £1,030,300, you’ll pay tax on the amount exceeding the limit when you withdraw it.
- Inheritance and how the drawdown scheme impacts your estate will also need to be considered.
There are pros and cons to pension drawdown schemes and deciding whether they are appropriate for your unique situation isn’t always easy. Speaking to an IFA can help you to make an informed decision and ensure your pension doesn’t run out before you do!
Giles Warren Financial Blog 