As we begin to look ahead to the winter months, there’s no doubt those eligible to take their pensions may be thinking about dipping into their pension pots, whether it’s to embark on that long-awaited skiing trip or purchase that much needed new central heating system in time for the cold snap. To fulfil such ambitions, some people may be considering the new pension drawdown option. So what is the pension drawdown? And what are the advantages and disadvantages to this method?
Drawdown is a way of achieving greater flexibility with your pension funds. Every time you move your money into drawdown, you’re allowed to take 25 per cent of this as a lump sum, tax free. Sounds good, but be warned, there are downsides too. The rest of the fund continues as an investment, with taxable income able to be drawn straight from your pension whenever you choose. The tax-free lump sum must be taken at the start, but as you don’t have to move your whole pension at once multiple lump sums can potentially be taken. Another attractive feature of drawdown is the greater flexibility it allows you in withdrawing your pension. You can choose regular withdrawals monthly, quarterly, biannually or annually, as well as having the option of taking one-off lump sums or taking a break from withdrawing whenever you like. Anything left after your death can be passed on to beneficiaries nominated by you. However, here comes the disadvantage and something you must be aware of. If you withdraw more than the amount by which your pension is growing, choosing to draw on capital will lead to your pension value going down over time. Another important aspect of drawdown is that it does not offer the secure income that other forms of pension do, such as an annuity. Your money could run out if you live for longer than you anticipated, you simply withdraw too much, or your investments underperform based on your expectations. A further risk to drawdown is that there will be variations in your yields over time, and you may end up receiving less than the amount you invested. So in brief, whether drawdown is right for you ultimately depends on how you weigh up the benefits of greater flexibility against the risks of investment and the possibility of running out of money.
No individual investment advice is given, nor intended to be given in this article and liability will be accepted in respect of any action you may take as a result of reading this article. If you are unsure you are urged to take independent investment advice.