Drawdown

SJP Drawdown

Drawdown (also known as pension drawdown, or flexi-access drawdown) is a way of taking money directly from your pension with no limit on withdrawals. You have flexibility over how you withdraw your pension money, so this can be either an income, a lump sum, or a series of lump sums. Typically, this would be from a defined contribution pension, such as a personal or workplace pension.

How drawdown works

You can choose to move all, or some, of your pension into ‘drawdown’ once you have reached age 55 (57 from 2028). Once you have done this, those pension monies become ‘crystallised’, which means the benefits have been accessed.

Step 1

Take advice to see if 'drawdown' is the right choice for you

Step 2

Decide how much of your pension funds you want to move into drawdown

Step 3

Consider your tax position (tax free cash vs taxable withdrawals)

Step 4

Consider how you would like to receive your money; income vs lump sum

Step 5

Review your pension funds to ensure your investment strategy continues to be fit for purpose

You are able to take 25% of the drawdown fund as a tax free lump sum. The remaining 75% can be drawn down in whatever amounts you choose, to provide an income or to use as lump sums, whenever you choose to do so. Any money that you draw out (beyond your 25% tax free lump sum) is liable to income tax at your marginal rate.

The pension funds that you haven’t withdrawn will continue to be invested, and your adviser will help you to think about how your drawdown funds should be invested. This is because you are asking your pension fund to work a lot harder, to typically provide an income but also maintain your capital and hopefully continue to grow.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

Benefits and risks of drawdown

There are many benefits to using drawdown as part of your retirement plans, but there are also certain restrictions and potential risks that you should be aware of, especially if you haven’t fully retired yet, or are perhaps semi-retiring and continuing to work.

What are the benefits of drawdown?

Flexibility

Drawdown enables you to structure the way that you want to use your pension funds to suit your retirement plans and circumstances. Everyone’s retirement is different, and having that flexibility means you are in control of how much income or lump sum you take, and how often.

Tax control

You are usually entitled to 25% tax free cash lump sum, any drawdown beyond this is taxed at your marginal rate. However you have control and can time your withdrawals. For example if you are currently a higher rate taxpayer, you might want to wait to withdraw further if you are going to become a basic rate taxpayer.

Remain invested

If this fits your views on risk during retirement, then using drawdown allows you to potentially grow your remaining pension capital.

What are the risks of Drawdown?

Market volatility

Your pension funds will continue to fluctuate in value depending on your investments and market conditions. This could impact your decisions around timing if you needed to drawdown from your pension.

If you withdraw money at a greater rate than the growth of your investment, your remaining fund will reduce in value and may not be sufficient to maintain the level of income you wish to draw.

Money Purchase Annual Allowance (MPAA)

The amount you can contribute to pensions annually is £60,000. However if you access your pension (beyond the 25% tax free cash lump sum), your annual allowance is reduced to £10,000. This could significantly impact your longer term retirement plans if you want to semi retire, but continue contributing to your pensions. 

Longevity

Having flexibility and choice comes with the responsibility to ensure your money lasts as long as you do. Many of us will under-estimate how long we are likely to live for, so judging how much to draw down sustainably can be difficult.

Taking advice before deciding

Pension drawdown can provide a huge amount of flexibility, for you to take your pension savings how and when you want. But it also involves many other decisions, and so it is vital to take financial advice, so that you are confident in your decisions and understand any potential consequences.