What is Pension Drawdown (a quick summary)?
Pension Drawdown is a way of taking your pension benefits, usually from age 55 onwards, without buying an annuity. The fund stays invested and your returns are dependent basically on any investment growth and the charges applied.
You can take tax free cash (within certain limits, more about this further below) and an income can be “drawdown”. Originally Drawdown was used to describe a “Capped” Drawdown. Introduced in the 90’s this was an alternative to purchasing your annuity at retirement.
Capped Drawdown allowed you to take your take free cash and an income calculated to be broadly similar to that you might get from an annuity. More recently, the Capped Drawdown has been replaced by Flexi-Access Drawdown and Uncrystalised Fund Pension Lump Sum (UFPLS) which provide a greater flexibility for you.
A bit confusing and still reading!?….stay with me…
Flexi-access drawdown came into force April 2015 allowing you to take your full tax-free cash without having to buy an annuity. The balance of your fund remains invested in the pension. The difference here between this and the Capped Drawdown is the full access to the remaining pot is accessible for you. This can be taken in full or in part at any time, and is taxable as income. So you have much more control. Obviously you have no guaranteed income and need to plan withdrawals carefully so as not to be tempted to take too much too soon and leave yourself exposed later. So it may or may not be suitable for everyone!
Uncrystallised Fund Pension Lump-sum (UFPLS) Drawdown
With Uncrystallised Fund Pension Lump-sum (UFPLS) you can take lump-sum withdrawals from your plan. 25% of each lump-sum is tax free and the balance of 75% of each lump-sum is taxable as income.
Client’s in Pension Drawdown, as with any pension, should periodically review the plan to ensure their plan is meeting objectives and any tweaks that might be needed.
• You can vary the income/amount you take
• Potential to grow your money if your investments grow well
• Any fund left on your death can be passed on to your beneficiaries
• No Inheritance Tax on death before 75
• Your income isn’t guaranteed
• You could run out of money if you’re not careful
• Your investments could perform badly and value could fall
• Need to regularly review your investments and income in line with your expectations
If you want to speak to an Adviser, Enquire here